Why Grandparents Should Add a 529 College Savings Plan to a Grandchild’s Back-to-School Shopping List
Notebooks. Check. Pens and pencils. Check and check. Backpacks. Check!
While back-to–school trips for school supplies signal an obvious sign of the changing season and the beginning of a new school year, it’s also an ideal time to start seriously considering an investment in a school-aged child’s college education.
Most of the burden of college savings usually falls on mom and dad, yet, according to a 2014 survey released by Fidelity, 72 percent of grandparents feel that it is important to help pay for their grandchildren’s college education. And, 90 percent said that if asked, they would likely help with college costs in lieu of other gifts.
What are my options?
There are countless programs available to help assist with college savings costs but the most popular program is a 529 plan. Simply, it’s a savings plan operated by a state or an educational institution and work much like a 401K or IRA.
The benefit of a 529 plan is you can contribute to a plan owned by your grandchild’s parent at any time. Your gift can grow significantly over time with the benefit of tax-free earnings and tax-free withdrawals strictly when the funds are used to pay for college. In addition, there is no limit as to how much you can contribute a year into the plan.
There are a couple of disadvantages, however, to be aware of: You don’t have any control of the funds in the plan since the primary account is in your grandchild’s parent’s name. And, only 10k per year can be deducted on your state returns provided that you have a 529 that is state sponsored (the state you live in).
Another option is to open a 529 plan in your own name. This option offers tax-free earnings and withdrawals when the money is spent on college expenses which can include tuition, books and supplies, and portions of room and board costs. You can contribute up to $70,000 into a 529 plan without a gift tax penalty if the contribution is made over a predetermined five-year period.
Before you decide which 529 plan is best, it is strongly advised to consider other options that exist for college costs. In addition, it is highly recommended to review your choices with professionals who can assist with your financial, legal and tax issues.
Circle the date on the calendar for back-to-school and start contributing toward your grandchildren’s college expenses.
About the Author
Ken Mahoney is a licensed financial advisor and CEO of Mahoney Asset Management. He’s an author of seven books including ‘A GPS for Your Retirement’, and frequent contributor on CNBC. He can be reached at (866) 270-2177.