Section 529 Plans for Grandparents
As you may already be aware, a Section 529 College Savings Plan is an excellent method of saving for a child’s college education.
The funds invested in a Section 529 College Savings Plan will grow on a tax-free basis and, when used for secondary educational expenses, can be withdrawn with no taxes ever paid. By never paying taxes on the plan income, you are effectively buying educational services at a “discount”, equal to the combined federal and state taxes that you would have paid on the plan’s growth.
What you may not know, are the benefits that Grandparents have when setting up a Section 529 Plan. The person that sets up the plan is the plan owner, with another person named as the beneficiary.
Setting up the plan is considered a completed gift to the beneficiary and is covered by the federal gift tax annual exclusion of $12,000. However, with a 529 Plan, you may elect to make a gift of up to 5 times the annual exclusion rate, allowing up to $60,000 to be given to each beneficiary or $120,000 if your spouse agrees to “gift splitting”.
If you are concerned that your estate may someday be required to pay estate taxes, this is an excellent way of removing up to $120,000 for each grandchild from your estate.
The unique part of a 529 Plan for Grandparents is that, even though the funding is treated as a completed gift, you, as the owner, have virtually complete control over the 529 Plan funds. In the future, you can change the beneficiary to anyone in your direct family tree.
You can even ask for the money back, if your finances change. If you ask for the money back, you must pay ordinary income taxes plus a 10% penalty on the 529 Plan’s income. However, all of the money used to fund the plan comes back to you.
The Section 529 College Savings Plan is the only plan, I know of, that allows you to give your money away as a completed gift, and still have virtually complete control of the funds. You can even choose the successor owner of the plan if you were to die.
For more information on the benefits of a Section 529 Plan and how to choose the best plan for your needs, go to www.savingforcollege.com.
2 Responses to 'Section 529 Plans for Grandparents'
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on September 9th, 2007 at 7:30 am
My sister writes that her family had “terrible” problems with the 529 plan that my father established for her grandchild.
It was in a Fidelity plan, (I’m not sure from which state.) My sister wrote that: “Fidelity “lost” half of the funds and it took Moi forever until he got them to “look” for the funds and “find” them.” So I take it that some of the 50 plans are better than others. Which states have really good plans?
What is the track record of the “good” ones? 6% a year, or 7% or even 8%? How do i research this? Which are unreliable? Do any of them really lose your money, or was this most likely an administrative glitch that is just part of the financial services industry, but is not really dangerous to your money?
Can you move your plan to another plan if you feel the original investment isn’t working out?
Thanks for your advice! I feel like i can completely rely on you to give me the “straight scoop!”
on September 9th, 2007 at 3:23 pm
I have never heard of a 529 Plan “losing” a participant’s money. It sounds like, even in your sister’s case, Moi was eventually able to find the “lost” money. I suspect it was some kind of administrative problem that caused this to occur.
There are many 529 plans to choose from and there is no requirement to use a plan that is in your home state. The best source that I know of for advice on Section 529 College Savings Plans is savingforcollege.com It even ranks the best plans offered in each state. Go to my links section to find this site.
If you choose a plan and are not happy with its performance, you may move the funds to another plan after 12 months, so you are not “stuck” if you do not like the initial plan you choose.
I hope this helps!