As a grandparent, you probably take a certain amount of pleasure in showering your grandkids with the occasional extravagance. That takes me to a story shared by my colleague Michael Graci, an investor education and retirement specialist here at BlackRock.
Mike’s sister was contemplating the idea of buying her nine-year-old granddaughter a pony for her birthday. Mike tallied the potential cost in his head (horse, boarding fees, veterinary bills, feed, saddle, bridles and, of course, riding lessons). Consummate professional (and good brother) that he is, Mike suggested she take that pony money and put it into a 529 plan for her granddaughter’s education. Tax-free growth over the years could potentially add hundreds if not thousands of dollars to that investment. “You may not win the ‘grandmother of the year award’ today,” he told her, “but in nine or 10 years …”
Mike was onto something, and I wanted to continue our conversation. So here is the abridged version for my readers, particularly all of you grandparents looking to gift your grandkids with something that is, in so many ways, priceless—a college education.
Rob Kron (RK): Should a grandparent open a separate 529 account or contribute to one the parent has established?
Mike Graci (MG): Most states allow you to contribute to a 529 created by someone else, but a grandparent can also create an account on behalf of a grandchild. This makes the grandparent the account owner, with full authority over the assets—when and how they are used, and for whose benefit. If you opt to contribute to a 529 created by someone else, or when assigning ownership of your account to a successor, make sure it is someone you have confidence will use those assets prudently.
RK: Why aren’t more grandparents opening 529s?
MG: 529 plans are only about 15 years old. Many grandparents did not have access to them when they were planning for the education of their own children, and many still do not know these programs exist. That was certainly the case with my sister.
RK: Will the grandparent’s 529 hurt the student’s chance of getting financial aid?
MG: Yes and no. There’s a common perception that financial aid implications may be less onerous when the grandparent is the 529 account owner. While it’s true that assets owned by a grandparent are not reported on a student’s federal financial aid application (FAFSA), be aware that any of those plan assets that are used to pay for college are reportable on the FAFSA the following year as student income. This potentially reduces the amount of future aid. For this reason, some students opt to use the assets held in a grandparent-owned 529 in the final year of college since they will not be filing a FAFSA the following year.
RK: And what about gift-tax consequences for the grandparents?