A Christmas Gift for the Ages

Not all Christmas gifts are created equal.

Sure, it’s great to give gifts to light up your child or grandchild’s face when they rip off the wrapping paper, but what about giving something for their future?

Two of my three kids have recently finished college and my third is a junior. One of the gifts I am giving to each of them is to continue to fund their 529 College Savings Plans.

I should step back and share that I started putting money away in 529 Plans when they were born and added to the automatic amounts I saved monthly every year. This early and consistent plan worked like a charm. With three kids at large universities at the same time, I had 100% of all their college costs sitting in investment accounts waiting for the bills.

Despite those days being behind me I haven’t stopped adding to these 529 accounts.

Why would I keep adding to these 529 accounts when my children are out of college?

1. I can afford to.  I’ve run multiple financial independence (retirement) planning scenarios to make sure my wife and I are good to go based on the assumptions we used. Always make sure your plan is solid first.
2. I’m hopeful this money will be spent on future grandchildren’s education. None of my kids are dating anyone right now, so grandkids are a ways off, but imagine the potential investment growth when it’s not needed for many years!
3. While living in IL, the first $20,000 in contributions are state tax-deductible (saving 4.95%) on contributions up to                           $20,000 x 4.95%=$990 in potential state income tax savings
4. The money can be invested in a high-growth (stock funds) portfolio and is not taxed while in the account.
5. It can be used for K-12, private schools (K-12 IRS update link), and in or out-of-state colleges.
6. When the money comes out of the plan, it’s income tax-free if used approved education-related expenses including room & board.
7. I’m especially excited about the flexibility to use it for K-12 education (up to $10k/year). I would have been really strapped to pay for my kids to go to private K-12 and still save for college. My kids may not have the money to do both, so I would love to give them the private school option. This is especially true with what starting to be taught in today’s public schools.
8. I am the owner of the accounts. I can make my wife, or my children the “successor owner” if I were to die before the money was paid out.
9. Not likely to be needed, but since I own the accounts, I can spend the money on a non-qualified expense. I have to pay income tax and a 10% penalty on the deferred growth in the account if I don’t spend it on a qualified education item.
10. While I am the owner of the account, I can move money between accounts as I see fit depending on how the grandchildren thing ends up working out. It’s great to be in control and have flexibility.
11. If/when I make my kids the owners of their 529’s, it moves the future growth of that money out of my taxable estate.
12. A recent FASFA rule change means using this money (529 owned by grandparents) no longer counts against their college loan calculation.New changes to the forthcoming simplified Free Application for Federal Student Aid (FAFSA) mean that students will not be required to report any cash support they receive, including funds from grandparent-held 529 accounts, in the future. This means funds in grandparent 529 plans won’t be counted at all — not when the FAFSA is filled out and not later when distributions are made to cover eligible college expenses.In other words, future changes to the way financial aid is determined to make it so students will not have to count 529 distributions from grandparents as untaxed student income the next year.

    Grandparent 529 Plans Get A Boost From New FAFSA Form

I love this gift planning strategy for all these reasons and you might too if your retirement plan is solidly funded.

Let me know if you have questions.