Many grandparents find themselves wanting to help ease the financial burden of college for their grandchildren.

Savings accounts such as 529 plans are one approach, but there are caveats that every grandparent should be aware of before they open or contribute to this kind of account.

Open 529 Accounts in Your Own Name

Grandparents frequently open and fund a 529 plan that is registered in the student’s name, or in the name of one of the student’s parents.

However, the Free Application for Federal Student Aid (FAFSA) takes into account all assets belonging to the college student AND their parents. Both of these approaches may potentially affect the student’s eligibility to receive needs-based financial aid.

As a result, in most cases, it is best for the grandparent to open the 529 account in their own name.

(If the student’s school uses the CSS Profile from the College Board, all 529 accounts are viewed as available assets, regardless of who owns them.)

Consider Upcoming Rule Changes

Up until recently, grandparent-owned 529 account distributions were viewed as untaxed income for the college student, which could have decreased the student’s financial aid by up to 50%.

However, the Consolidated Appropriations Act – aka the COVID-19 relief bill – that Congress passed in December 2020 will change how FAFSA treats grandparent-owned 529s.

The new FAFSA, which will go into effect for the 2023-2024 school year, will not require applicants to disclose any information about this type of account.

FAFSA is based on prior-prior year income and tax filings, which means that 2021 will be the first reporting year for the new FAFSA.

Consider Using a Roth IRA

529 accounts are just one option for helping your grandkids pay for college. But, I would be remiss if I didn’t mention another attractive option: your own Roth IRA.

Here on the Retirement Tips blog, we just love Roths. One benefit of the Roth that isn’t commonly considered is its ability to help pay for post-secondary education costs for self, spouse, children, AND grandchildren.

Since Roth IRA contributions are made on an after-tax basis, you won’t pay income taxes on any contribution withdrawals. Distributions that include earnings on contributions are also tax-free, provided that the account is at least five years old. If the withdrawal is being used to pay for qualified education expenses, you also won’t pay the 10% early withdrawal penalty – even if you’re not age 59 ½.

Looking for more ideas on how to chip in for your grandchild’s education? Our financial advisors have plenty, and they’d love to talk to you–for free! Click here to set up your no-obligation appointment today.