A Grandparent’s Lasting Gift: 529 College Savings Plans
By A. Scott White, CFP®, ChFC®, CLU®
President, Scott White Advisors
Making it possible for a grandchild to attend college can make a difference in that child’s life—forever. A study from Georgetown University found that, on average, college graduates earn $1 million more in earnings over their lifetime. And another study by the Pew Research Center found that the median yearly income gap between high school and college graduates is around $17,500.1
Grandparents can invest in 529 college savings plans as a tax-efficient way to save for their grandchildren’s college educations. Plan funds are protected from bankruptcy and if the student doesn’t deplete the account, the funds can later be transferred to another relative who is or will be a student.
College expenses are rising every year, according to the College Board’s latest report on the total average costs* of a college education.2 Average estimated undergraduate budgets for 2018-19 were: $25,890 for four-year public colleges for in-state students, on campus; $41,950 for four-year public colleges for out-of-state students, on campus; and $52,500 for four-year private nonprofit colleges, on campus.
*Total average cost: tuition and fees, room and board, books and supplies, transportation, and a small amount
for miscellaneous expenses.
In addition to furthering the education of the 529 plan recipient, one of the benefits of a 529 college savings plan is that all distributions used to pay for qualified education expenses are federal tax free.
Qualified Education Expenses
Tuition: Considered a qualified education expense for both full- and part-time students at accredited institutions. (To check whether the school is accredited, go to ope.ed.gov/dapip/.) Study abroad programs can also be qualified expenses, particularly if the student is receiving credit for attending.
Room and board: Dorm room and sorority/fraternity living quarters are qualified expenses if the student is enrolled in an eligible college at least half of the time. If the student lives off campus, qualified room and board costs are limited to what’s included in the college’s cost of attendance (COA) allowance for the period. Costs in excess of the COA aren’t considered qualified expenses.
Books and supplies: Included expenses comprise all textbooks and other required reading materials, plus supplies such as pens, paper, and calculators.
Computers and peripheral equipment: This includes tablets, laptops, printers, internet access, and necessary software, such as Microsoft Word and AutoCAD.
Special needs resources: If the student has a disability and needs assistance or special equipment, these costs are considered qualified expenses.3
Plan proceeds can be used to pay for other expenses, but any earnings from these withdrawals are subject to federal income taxes and applicable state taxes, plus a 10% penalty. You may also have to pay back income-tax deductions you claimed on your previous tax returns. Nonqualified expenses include:
Cell phones and data plans: While these aren’t qualified expenses, be sure to check with the college, as many schools offer student discounts on plans and phones.
Transportation expenses: Whether it’s the cost of getting to campus daily or traveling home, these expenses are already factored into the overall COA by most schools.
Health insurance and medical bills: As these aren’t considered education expenses, they aren’t qualified.
School memberships: This includes annual dues for joining sororities or fraternities, sports teams, and gyms.
Student loans: If used to pay back borrowed funds, you’ll have to pay taxes and a 10% penalty on the withdrawals.3
Regardless of whether expenses are qualified or nonqualified, be sure to keep receipts, as you’ll need them when doing your taxes.
There are many 529 plans to choose from, and many states offer extra tax benefits for creating and contributing to your home state’s college savings plan. However, make sure the benefit of your in-state tax savings outweigh possible higher fees or loss in flexibility.
Grandparents, and others who want to support a child’s college education, may find that 529 college savings plans are a tax-effective way to invest money for a college education and may provide additional gift and estate tax planning opportunities.
1Do College Grads Really Earn More than High School Grads? https://www.cornerstone.edu/blogs
2Trends in Higher Education. https://trends.collegeboard.org/college-pricing/figures-tables/tuition-fees-room-and-board-over-time
3What you can—and can’t—pay for with your 529 college savings plan account https://www.jhinvestments.com/viewpoints
Rules governing 529 plans are varied and subject to change. There are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents.
Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. The tax implications can vary significantly from state to state. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement, and should be read carefully before investing.