June 5, 2016

Who Owns the Section 529 Plan?

By James Sacher, Partner, Tax & Business Services

Who Owns the Section 529 Plan? Tax & Business

What to Look For

If your family is planning for college and has contributed to a 529 plan, or if you are contemplating 529 plans with children nearing college age, you should take a close look at who owns the 529 plan to make sure it doesn’t negatively affect your financial aid.

The Opportunity

The main advantage of a 529 plan is that earnings are not subject to federal tax or state income taxes when the funds are used for the qualified education expenses of the designated beneficiary, such as tuition, books, fees, and room and board. And, although contributions to a 529 plan are not deductible for federal income tax purposes, they may be for state tax purposes.

In addition to the tax benefits, proper ownership of a 529 plan could help increase the amount of college financial aid. If the ownership of a 529 plan is held by a grandparent, it does not need to be listed as an asset on the Free Application for Federal Student Aid (FAFSA) form when applying for financial aid for college, even though the funds are intended for the student applying for aid.

Parents can gift the necessary funds to the grandparents (keeping in mind the limits to avoid any gift taxes) so that the grandparents can make the contributions to the 529 plan in their own name. Time the use of the 529 plan withdrawals from the grandparents’ account to be after January 1 of the student’s junior year, or change ownership to the parent after that date. Be cautious of using grandparent-owned accounts before this time, because those distributions count almost ten times as much as distributions from parents’ accounts in determining financial aid.

The Benefit

Having grandparents own 529 plan assets will not increase the amount of family assets to be reported on the annual FAFSA form, even if earmarked for the applying student’s college costs. The lower the amount of family assets, the greater the amount of student aid that will be available for the student. Transferring the grandparents’ 529 assets to the parents, or taking distributions for education costs after January 1 of the student’s junior year, will not count toward the family’s untaxed income when completing the FAFSA form for the student’s senior year.

There are many other meaningful ways to stretch your dollar in our new e-book: 12 (More) Great Ideas. Do you have a question about how this information applies to you? Email Jim Sacher, CPA or call him at 440-449-6800.

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Tax & Business