The Recent FAFSA Changes: A Boost for Grandparents Supporting College Education
In a significant development, the FAFSA Simplification Act, implemented just last month, has expanded the ways in which grandparents can contribute to their grandchildren's college education. This change brings a breath of fresh air by addressing the impact of contributions and distributions from a grandparent's 529 college savings plan on FAFSA reporting, potentially affecting the student's eligibility for federal financial aid.
Understanding the 529 Account
Before delving into the recent changes, let's clarify what a 529 college savings account entails. This specialized savings account allows individuals, including grandparents, to set aside funds for future college expenses. Although contributions aren't federally tax-deductible, the positive aspect is that earnings within the account grow tax-free. Withdrawals for qualified education expenses remain untaxed.
The New Rule's Impact The pivotal change revolves around how the 529 plan is treated on the FAFSA. Formerly, if a grandparent owned the plan, distributions were considered untaxed income for the student, potentially impacting financial aid eligibility. The new rule eliminates this concern, meaning a grandparent-owned 529 plan will no longer require reporting on the FAFSA. Importantly, distributions from this plan will not be considered untaxed income, opening avenues for grandparents to support their grandchild's education without jeopardizing financial aid eligibility.
Strategies for Grandparent Contributions When contributing to a 529 account for a grandchild, several factors merit attention:
1. Qualified Educational Expenses: Funds from a grandparent's 529 plan can cover various qualified educational expenses, but it's crucial to note exclusions such as insurance, student health fees, transportation, and extracurriculars.
2. Annual Gift Exclusion: Grandparents should be mindful of the federal annual gift exclusion, currently set at $18,000 for an individual and $36,000 for joint filers. A special rule allows spreading larger one-time gifts across five years.
3. Payment Methods: While distributions directly paid to the school from grandparent-owned 529 accounts won't impact aid eligibility, it's generally recommended to pay the grandchild directly.
4. Timing Considerations: Withdrawing funds within the same tax year as educational expenses ensures adherence to tax regulations and smooth financial transactions.
5. Withdrawal Limits: The total withdrawal from all 529 plans should match the total cost of qualified educational expenses billed by the school. Exceeding this limit may incur a 10 percent penalty, with a 60-day window for rectification without penalties.
Ensuring a Loving Legacy
Understanding the new FAFSA rule and strategically utilizing 529 plans allows grandparents to contribute meaningfully to their grandchild's education without compromising financial aid opportunities. Beyond financial considerations, a 529 account becomes an invaluable tool for leaving behind a legacy of love and wisdom, shaping a brighter future for the younger generation.
At our firm, we embrace this approach to estate planning as Life & Legacy Planning, emphasizing the importance of heart-centered decisions that provide peace, love, and guidance to your loved ones today and for years to come in the future.