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Helping pay for college can alleviate a lot of stress that a grandchild or the parents of a grandchild may be feeling. It also makes the grandchildren happy and gives them the educational tools to forge a career and support themselves for the rest of their lives. This gift is one that many grandparents are not only happy to give, but look forward to.
However, in order to make sure that this assistance does not have a negative impact on you or your grandchild, we recommend that you take a step back and consider the best ways to help them pay for education before cutting any checks.
A 529 plan is a type of investment account, typically sponsored by the state, that you can use for higher-education savings. What makes a 529 plan so powerful? A few things:
- Earnings grow federally tax-deferred.
- Qualified withdrawals are tax-free (state and federal).
- In New York, you may be able to deduct as much as $5,000 ($10,000 if you’re married filing jointly) of your contributions when you file your New York State income tax returns.
If you are a grandparent who is interested in helping your grandchild with the cost of their education, you should consider creating a 529 savings plan. The savings plan is not limited to grandparents; just about anybody can open a 529 account, as long as he or she is a U.S. citizen or a resident alien. Furthermore, 529 plans, which are also known as “qualified tuition plans,” can be used for elementary, high school, or college, as long as the institution is qualified.
Another bonus of 529 plans is that the funds saved within them are transferrable. For example, let’s consider Virginia’s situation. Virginia has three granddaughters—Megan, Kaitlyn, and Erin—who are all sisters. Years ago, Virginia set up a 529 plan for each of her granddaughters in anticipation of the cost of their education.
Megan, the oldest, graduated valedictorian of her high school and received a full academic scholarship to the college of her choice.
Kaitlyn, the middle granddaughter, is an honor student and a track superstar in her high school. She is expected to receive scholarship offers from several colleges next year. Kaitlin expects that she will likely receive at least a partial scholarship to the college that she has her heart set on.
Erin, the youngest granddaughter, will enter high school next year. She really wants to attend a prestigious private school in hopes that it will help her gain admission to Harvard in four years. Although Erin has great grades and has been accepted to the private high school, Erin’s parents cannot afford the tuition payments.
In this scenario, Virginia can transfer the funds in the 529 earmarked for Megan to pay for the balance of the college tuition for Kaitlyn if she does not receive a full scholarship. She can also transfer the balance (if there is anything left) to pay for the tuition for Erin’s private high school.
If the beneficiary doesn’t want to continue his or her education, then you can stay invested in case he or she decides to attend school later (there is no age limit on using the money), or you can change the beneficiary to an eligible family member, as explained above.
In the next article, we will explore other protective strategies to help your grandchildren or loved ones cover the costs of college.
Eric J. Einhart
Russo Law Group, P.C.
100 Quentin Roosevelt Blvd., Suite 102
Garden City, NY 11530