With the average cost of tuition and fees for a private university during the 2019-2020 school year at $36,880, according to the College Board, a grandparent’s money can bridge the gap between a free ride to college and the crushing burden of student loan debt.
“Grandparents often want to leave a legacy for their grandchildren,” says Mark Kantrowitz, publisher and vice president of research for SavingforCollege.com. Opening a 529 plan, a tax-advantaged investment account for educational expenses, is one way to do that.
Consumers make after-tax contributions to a 529 plan, and the investment earnings and withdrawals are tax-free as long as they are for qualified educational expenses such as tuition and textbooks. Thanks to the Tax Cuts and Jobs Act of 2017, 529 plans can also be used to pay for expenses related to elementary, middle and high school. Last year the Setting Every Community Up for Retirement Enhancement (SECURE) Act gave beneficiaries and their siblings the ability to use up to $10,000 apiece from a 529 plan to repay student loans.
While a grandparent can contribute to a parent-owned 529 plan, “some grandparents might not be on the same page as their kids, as far as how money is used,” says Jeff Fishman, founder and managing member of Los Angeles-based wealth management firm JSF Financial. Opening their own 529 plan can help grandparents maintain control.
If you’re torn between opening a 529 plan for your grandchildren or contributing to a plan that is already established, here’s some food for thought to help you make your decision.
Tax breaks may come with ownership
Not only does your money grow in the account tax-free, but some states offer a tax break for contributions made to a 529 plan. However, in some cases only the plan’s owner can take advantage of them. (That would be you if you start one for your grandchild, who would be the beneficiary). “While there are 34 states and the District of Columbia who have state income tax breaks based on contributions, in 11 of those states the state income tax break is limited to the account owner,” Kantrowitz says.