The theme this week on the One Minute Retirement Tip podcast is: grandparent-owned 529 college savings plans. 

Today, I’m talking about grandparent-owned 529 plans and financial aid for college, and the historical challenges that made these accounts less appealing for grandparents to own on behalf of their grandchildren. 

That’s all changed now, but you may have heard that grandparent-owned 529 plans are a bad idea. That’s because money paid out from grandparent-owned 529 plans used to impact financial aid eligibility. A withdrawal from a grandparent-owned 529 account to pay for college could have reduced that student’s financial aid by 50% of the distribution amount. So if you used $20,000 from the 529 account to pay for college that year, financial aid amount would be reduced by half of that amount, or $10,000. Why? Because the withdrawal counted as untaxed income to the student and would show up the next time the FAFSA was filed for financial aid. 

That wasn’t the case for parent owned 529 plans which were included as an asset on the FAFSA and were treated differently as a result. So grandparents had to get creative if the grandchild was applying for financial aid. This often involved waiting to disperse the funds from 529 plans until later in college years, or changing the account owner to the parent, but there were some potential tax consequences for that. 

The point here is that you may have heard that grandparent-owned 529 plans were a bad idea. That’s not true, but the rules were clunky and unfair and they just changed this year...I’ll talk more about that tomorrow. 

That’s it for today! Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance