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Are 529s a Money Trap?

Help a grandchild, but beware the potential drawbacks

  • Choose Your Plan Wisely

    You can use any state's plan, but check your home-state 529 first to see if it's among the majority of state plans that offer a tax deduction for contributions. — Mark Nerys

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  • It Will Be a Balancing Act

    Using a grandparent's 529 for tuition can end up reducing a grandchild's need-based financial aid. — Mark Nerys

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  • Not All Fees Are Created Equal

    Some 529s have high fees, which ultimately means less money for college. The most recent figures from Morningstar show annual fees ranging from 0.08 to 2.38 percent. — Mark Nerys

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  • Double-Dip Dilemma

    If a parent and grandparent each have 529s, failing to coordinate withdrawals can lead to a tax and penalty for one of them, says Joseph Hurley, founder of Savingforcollege.com. They can't both claim their 529 dollars are paying the same education bills, or double-dip on the tax break. Plan with your financial adviser how to structure withdrawals annually. Or the grandparent can transfer his or her 529 to the parent. — Mark Nerys

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  • Beware the Medicaid Menace

    Medicaid pays nursing home bills for the poor. But a 529 can delay your eligibility for Medicaid assistance. That's because the 529 money is considered your asset, even if it's intended for a grandchild, notes the Centers for Medicare and Medicaid Services. You would have to "spend" that money for your care before Medicaid would kick in. If you do use the 529 money for anything other than college, it would trigger a tax on the investment gains plus a 10 percent penalty. — Mark Nerys

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