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saving for college

What If Your Grandchild Doesn’t Want to Go to College?


Imagine saving for your grandchild’s college education and then years later learning that the grandchild has decided not to go.

You might naturally wonder what would happen to all the money that you had set aside to pay for college costs, you wouldn’t be alone.

In a new survey conducted by Legg Mason, one of the world’s largest asset management firms, the second biggest concern that grandparents expressed about using 529 college accounts was the fate of these assets when a grandchild doesn’t attend college. Nearly one out of every four grandparents surveyed said the biggest drawback of 529 Plans was that their college accounts would be penalized if the money wasn’t devoted to college expenses.

The consequences of using 529 money for anything other than higher education can be stiff. If you end up using 529 proceeds for non-college expenses, you’ll owe income taxes on the earnings, plus a 10% additional tax on those earnings.

The good news is that it is possible for you not to be subject to these taxes. One way is to name another family member as a beneficiary of the unneeded 529 account. “Family member” means an individual who is related to the beneficiary such as siblings, step-siblings, aunt or uncle, or first cousin. You could even name yourself.

The Legg Mason survey indicated that many grandparents are unfamiliar with this feature of 529 plans. According to the survey, for example, only 18% of grandparents were aware that unused funds in 529 accounts for grandchildren could be used for their own education by changing the account benefit to themselves.

Grandparents might also wonder what would happen to their 529 accounts if their grandchildren don’t need the financial help because they won a full-ride, academic or athletic scholarship. Under these circumstances, assuming the grandparents did not change the account beneficiary to another family member and simply withdrew the same amount of money as the scholarship, the earnings would be subject to income tax, but not the 10% additional tax.

To learn more, please visit scholars- choice.com

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Christine Crosby

About the author

Christine is the co-founder and editorial director for GRAND Magazine. She is the grandmother of five and great-grandmom (aka Grandmere) to one. She makes her home in St. Petersburg, Florida.

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