With college prices rising, so are the number of options students can pay for their education. Grandparents paying for their grandchild’s educations is new yet crucial for grandparents and students to understand.
For a lot of families, paying for college can be a struggle. When most parents send their child to college, they are either paying for their child’s education or getting help through financial aid. There are also two ways that grandparents can help fund their grandchild’s education, some with tax advantages.
By direct payment to the school
Grandparents can fund their grandchild’s education by making a direct payment to the institution. Grandparents can simply write a check to the tuition for any amount they want without triggering gift-tax implications. This is a smart option if the grandparent would rather pay the university directly. This also leaves open the option for grandparents to still give their grandchild an additional $15,000 tax-free via a 529 plan. If money is paid directly to an institution for tuition of a family member, the grandparent cannot claim a charitable distribution for this money.
With a 529 plan
A grandparent can help fund an education by investing in a 529 college savings plan. This plan is suggested by financial advisors due to several advantages the plan offers. This plan offers both tax-deferred growth on every dollar invested, and distributions are tax-free when used for qualified educational purposes. The plan is flexible in which any unused funds can be transferred to another family member. A max of $15,000 a year per grandchild in the plan, without triggering any gift-tax consequences. (A gift-tax is a tax on money or property that one living person gives to another. When someone does give a person money or property, the recipient may incur capital gains tax when the gift is later sold. Here, staying under the $15,000 maximum will help avoid that tax.)
A grandparent can either own a 529 plan or contribute to a 529 plan that is owned by the parents of the child. An advantage to owning the account is that the grandparent can control where all the money goes. If needed, a grandparent can use the funds for themselves. Yet, when a grandparent owns an account, distributions count as student income on the Free Application for Federal Student Aid (FAFSA), and student income is weighed more heavily than parental income in the aid formula.
On the other hand, if a grandparent chooses not to own a 529 account, they can simply contribute a certain amount of money each year to the account. This is appealing for those who would rather give smaller amounts of money per year. The downside is that the grandparent doesn’t have control of the money in the account.
Patelco is not a tax advisor, and the information provided here is for informational purposes. Before making any financial decisions that could trigger tax implications, we suggest you talk to your tax advisor.
Source(s) consulted: Broadridge Financial Solutions.