Grandparent-Owned 529s and Recent Rule Changes: What You Need to Know

Paying for college these days can be hard for many families, but many families are blessed with grandparents from the Baby Boomer generation, who have been excellent savers and have the ability and desire to pass along their savings by helping to or, even in some cases, fully paying for their grandchildren’s college.  The use of a 529 College Savings Plan has been one of the favorite ways of doing so since these plans allow the invested funds to grow tax-deferred and be withdrawn tax-free if used to pay for qualified educational expenses.  529 also helps many grandparents build an educational legacy for their grandchildren while taking advantage of tax and estate planning benefits. Several Lockheed Martin retirees who don’t necessarily need the extra income from their 401(k) accounts have been taking advantage of 529s for years.

With 529s, there was a catch when it came to how the assets were counted for the grandchild’s student aid eligibility!  If the account was owned by the student or the parent, any distributions were ignored on the Free Application for Federal Student Aid (FAFSA). However, if a grandparent, or anyone else, owned the 529 the distribution would be considered untaxed income to the student, which reduced eligibility for need-based aid by as much as 50% of the amount of the distribution.*

Thankfully this will no longer be an issue!   Savingforcollege.org tells us that there are upcoming changes to the FAFSA, which allows grandparents to no longer worry about thefinancial aid trap”.  They explain that “The updated FAFSA does not require students to manually report cash support. That means a grandparent-owned 529 plan will not have any impact on need-based financial aid eligibility. With the new form, the amount of a student’s “total income”, which includes untaxed income, will come directly from federal income tax returns via the IRS Data Retrieval Tool (DRT). So, a student’s total income amount will only consist of data that comes from the federal income tax return.

A student’s FAFSA includes income and tax information from the prior-prior year, so the 2023-24 FAFSA will include information from 2021 tax returns.” In other words, a grandchild will not have to report a distribution that was taken from a grandparent’s 529 plan. 

On June 11, 2021, the Department of Education announced that the proposed FAFSA simplification changes will be delayed. The provisions will happen in phases, beginning with the 2021-22 award year and extending to the 2024-25 award year. A new FAFSA form will not be released on October 1, 2022, as originally planned. Therefore, until income reporting changes take effect, grandparent 529 plan distributions may count as untaxed income on a student’s FAFSA.

We encourage you to look at your overall financial plan and have a discussion with your financial planner/advisor to discuss how using a 529 Plan can work in your personal situation.  If you don’t have an advisor or would like a second option, we’d be happy to sit down with you.  Give us a call today at 817-210-3444 or click HERE to book a complimentary consultation with one of our Lockheed Martin specialists who can review your situation and help you continue to plan for retirement.  

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Be sure and check back next week for more incredibly valuable information. Cheers!


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