Leaving a legacy is an important part of creating a financial plan, but a legacy shouldn’t have to wait until after you’re gone. Giving now provides you the gift of participating in sharing your wealth with your loved ones while sharing the things you value and creating teaching moments today. I have had the privilege of developing giving plans with my clients for many years, and one of the most rewarding conversations is planning for the education of grandkids. Not only does this give you an opportunity to share your wealth, it can be a way to instill in your grandchildren, from a very early age, the value of education.
When I sit down with my clients to discuss the different strategies for supporting education, a conversation about 529 plans usually ensues. There are a few important things to consider before you open a college 529 savings account. If an account has already been established by your grandkid’s parents, you might consider contributing to that plan instead of opening a separate account. Who owns the account may play a part later in determining eligibility for student financial aid. It’s important to understand how assets are reported on the Free Application for Federal Student Aid (FAFSA), the document your grandkids and their parents may be completing as early as October 1st the year prior to their first year in college and each year they attend.1 The amount of aid offered may be significantly affected by who owns the account.
If the account is owned by the parent, need-based aid eligibility may be reduced by a small amount. If the account is owned by the student, need-based aid eligibility may be reduced by more. However, if the account is owned by anyone else, e.g., a grandparent, distributions could reduce need-based aid eligibility up to 50% of the amount of the distribution.2
If you decide that you would like to be the owner of the account, or if you have already established 529 accounts in your name, a way to maximize your gift may be to hold off taking a distribution until your grandchild’s later years of college. Because FAFSA looks back two years when determining need, distributions made in the later years may not be assessed.3
Some of the common hurdles associated with 529 plans include uncertainty such as, “Will my grandchild even attend college?” Another concern may be that the funds will not be necessary due to an earned scholarship. If you are the owner of the account, you may always withdraw the funds with a 10% penalty for non-qualified withdrawals and taxes owed on the gains.4 There is the option to pass it on to another qualifying family member without recourse, or you may even decide to use it for yourself.5 Retirement is a time to live your passions, and going back to school to enrich your mind might be the best way to fulfill a passion. If your grandchild has been fortunate enough to receive a tax-free scholarship or attends a U.S. Military Academy, the 10% penalty may be waived for the scholarship amount.6 (Please note that there may be taxes owed on the investment gains.)
Many times the hurdles associated with 529 plans outweigh the tax benefits. In these cases we explore alternative methods of supporting the cost of education for loved ones. Even something as simple as setting up a separate taxable account in your own name, choosing a parent as the beneficiary, and funding the account systematically can work for some families. If you do this, be sure the parents know that this account exists and what the purpose of the account is for before you die.
My clients have heard our adage here at Navigation Retirement Group, “Dream. Plan. Execute.” many times over the years. At our first meeting, we start with your dream, and in most cases, this includes the legacy you want to leave to future generations. Next, we devise a plan that will help make that dream a reality. Finally, when it comes time to execute the plan, to make it happen, having an education cost strategy in place and making regular contributions will give you the peace of mind that the younger generations of your family will grow up with the knowledge that their pursuit of an education has not only been made possible through your generosity, but the importance of education has been instilled in them with the hopes of being carried on for generations to come.
Caveat emptor: Since nothing in this blog post can be considered bespoke advice to you, be sure to consult with your investment and/or tax professional before implementing any education savings strategy.
1Free Application for Federal Student Aid, 2010. Federal Student Aid, An Office of the U.S. Department of Education. August, 2018. FAFSA.gov.
2 Kathryn Flynn. “Yes, Your 529 Plan Will Affect Financial Aid,” March 14, 2018. Saving for College, LLC,2018. www.savingforcollege.com.
3Free Application for Federal Student Aid, 2010. Federal Student Aid, An Office of the U.S. Department of Education. August, 2018. FAFSA.gov.
4AZ 529 College Savings Plan, 2018. Arizona Commission for Postsecondary Education. August, 2018. AZ529.gov.
5, 6 Kathryn Flynn. “5 Ways to Spend Leftover 529 Plan Money,” August 27, 2018. Saving for College, LLC, 2018. www.savingforcollege.com.
Jack Davis is the founder and CEO of Navigation Retirement Group, an independent wealth management firm serving high achieving retirees and pre-retirees with investable assets between one and ten million dollars. For nearly three decades, he has been using his asset management and financial planning skills to develop and implement planning strategies that help pursue his clients’ unique goals. Passionate about education, he holds a Masters in Personal Finance and the CERTIFIED FINANCIAL PLANNER™ credential. He is also the author of Cash Out! Retire on Your Terms, Live Well and Die Happy, a book that gives pre-retirees and retirees planning tools and insights that can help them flourish throughout retirement. Based in Oro Valley, he and his team serve clients throughout the greater Tucson area and around the country. Learn more by connecting with Jack on LinkedIn or visiting www.navigationretirement.com.
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