The Parsec family has been experiencing a baby boom recently, with the addition of 8 new baby boys and girls added to the ranks. My wife and I have been fortunate to be part of this expansion with the birth of a baby girl. Now that the initial excitement has somewhat subsided and I have adjusted to a new sleep pattern, I’ve begun to think about our daughter’s future … a common topic around the office these days. It’s eye-opening to think that this wiggly little baby is closer to her freshman year of college than I am! Time to start saving! But how? What if the grandparents have offered to help?
For educational expenses, we decided that the 529 plan was the best option for us. Updated tax law allows for the use of 529 funds for private k-12 tuition, up to $10,000 annually. These plans are no longer used only for post-secondary expenses and there is no annual spending limit for qualified post-secondary education expenses. One upside is that there is no limit to the number of plans that can be opened for a single beneficiary. My wife and I can open one plan and the grandparents can open a plan as well; if they prefer, the grandparents, or anyone else for that matter, can contribute to the parent-owned plan – there are no limits on the number of contributors. Contributions do count as gifts to the beneficiary however, so staying below the current $15,000 per person gift tax exclusion in an important consideration. However, it is permissible for an individual to gift up to $75,000 in one year to a 529. This is a strategy called forward gifting, which allows a person to contribute five times as much money to a 529 in a single year, providing no other gifts are made during that time period. Combined, grandma and grandpa could gift $150,000 in 2019 for the benefit of their grandchild.
One of the major benefits of a 529 plan is the tax-free growth and tax-free withdrawals for qualified expenses. Even if you are spending along the way, you could have quite the nest egg for college. For example: If the new grandchild goes to private school for k-12 using the full $10,000 allowed tuition expense each year, and the 529 plan earns an average return of 6%, the $150,000 plan balance started at birth will still be worth approximately $240,000 when college rolls around. In 2018 the average cost of tuition, room and board for one year at a public university was a little over $20,000; increasing at a rate of 5%. This means that in 18 years, annual expense at a public university could grow to be nearly $50,000. Fortunately, because of proper planning, the 529 plan started at birth still has sufficient funds for a quality undergraduate education and maybe a few years of grad school as well.
Many grandparents considering gifting to a 529 plan wonder what happens in the scenario where funds remain after all educational expenses have been paid. Fortunately, the 529 plan beneficiary can be changed to another member of the family and even passed through the generations. So remaining funds could become the start of a 529 plan for a great-grandchild. The worst case scenario sees the owner of the plan withdrawing funds to pay for non-educational expenses in which case earnings growth above the original contribution would be taxed as ordinary income plus a 10% penalty rate. Clearly the better scenario is to continue to change beneficiaries until educational expenses have fully depleted the plan.
If you are interested in funding a 529 plan for a child or grandchild reach out to your Parsec financial advisor. You can also do your own research at www.savingforcollege.com. The website even has an information section specifically for grandparents. 529 plans are not the only option for saving for college tuition so talk to your advisor to learn all of your options.