How Much Can Parents and Grandparents Contribute to a 529?
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live with dignity and fulfill their moral obligations towards charitable activities)
Here is another way of helping your children and grandchildren. This is the best way to set aside money for college with cost of education skyrocketing every year. This is the best way to make sure that your loved ones will have funds for college and their education will not be interrupted due to lack of funds. Keep in mind that the money you add to this account will continue to grow from my experience. Investing and compounding can add up to tremendous amount of money. The power of investing is so huge that most people can’t imagine. The amount of money you put in make sure it is invested properly and if you follow to help them, follow my philosophy. You and your loved one will be delighted.
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How much can a grandparent contribute to a 529? Does it matter in which state I live, in which state my grandchildren live or in which state the 529 plan is based?
Limits are the same no matter who’s contributing to the 529. Each of these state-sponsored 529 plans has its own cap on the account’s size, usually more than $250,000.
Parents, grandparents and others contributing to 529s on behalf of a student usually try to stay within the annual gift-tax reporting exclusion, which is $14,000, or $28,000 for a couple, per beneficiary, she says. The 529 plans have a special tax advantage: You can front-load contributions five years at a time, allowing you to put in $70,000, or $140,000 per couple, all at once. However, you won’t be able to give to the same beneficiary by contributing to a 529 or making any other gift for the following four years or you’ll be liable for gift taxes.
The residency of grandparents or grandchildren has no bearing on 529 contributions; nearly all 529 plans are open to residents of any state and the plan’s rules apply to all participants in the plan, regardless of residency, says Peg Creonte, senior vice president at Ascensus College Savings. It should be noted, however, that some states offer their residents tax benefits for contributions to an in-state 529, Ms. O’Leary says.
There is no need to change beneficiaries, though the Internal Revenue Service allows it. The value of the 529 plan owned by a grandparent (or anyone other than a parent) isn’t included as an asset on the Fafsa financial-aid application. When the student takes out money to pay for college expenses, that withdrawal counts as income on the following year’s Fafsa. Starting with the 2017-18 academic year, the distributions from a 529 plan would be reported as student income two years after the money is used for college expenses, Ms. O’Leary says. Student income, including 529 withdrawals, will typically reduce the amount of financial aid a student will receive.
”Because of this treatment, some grandparents wait until the last years of college to withdraw money from a 529,” Ms. Creonte says.
A 529 can have only one beneficiary, so your twins can’t share an account. But you are allowed to switch the beneficiary to another member of the family at any time with no tax impact. As such, you may want to change the beneficiary on your son’s account to your daughter, and use the account for her qualified educational expenses, says Ms. Creonte. If there is money left over in the account once you are done paying her expenses, you can always change the beneficiary back to your son and use the funds to pay for his qualified graduate-school expenses, she says.
Veterans’ educational assistance isn’t the same thing as a scholarship under the 529 rules. However, this type of government assistance does count as an exception to the 10% penalty, just as a scholarship would, Ms. O’Leary says.
529 accounts can be funded from trust distributions; in addition, many 529 plans also permit trusts to own the 529 account for the benefit of the named beneficiary, Ms. Creonte says. Check with your tax adviser about how your trust should use gift-tax exclusions.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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