529 Plans and Financial Aid – Ep 06

A new grandchild often inspires us to do something to help with future education costs.  And Most  people automatically think about a 529 plan.  That’s understandable. There aren’t many types of accounts which allow for TAX FREE growth.

But before you open that new account, you should be aware of a couple of “traps.”  We’ll talk about it on today’s episode of Monday Morning Money.

Video: 529 Plans And Financial Aid

Plan for A Better Retirement

We created Monday Morning Money with one goal in mind.  Give you information to inspire you to plan for a better retirement. 

We publish a new episode each week.  And, we will deliver it right to your inbox.

Don’t miss an episode, subscribe today!

Get Free Weekly Tips!

* indicates required

529 plans were created in 1996. They allow for Tax Free growth when used for qualified education expenses. On the surface, they seem like the perfect tool to help save for the future costs of college.

But there are a few traps. Most of those issues center around how this account impacts financial aid.

The Hidden Financial Aid Trap for a 529 Plan

A 529 plan owned by a parent impacts the financial aid formula. But, an account owned by a grandparent doesn’t count in the expected family contribution. At first thought, you might think grandparents should own the account.

And here is where you find the hidden problem.

A distribution from a 529 plan owned by a grandparent counts as income to the student on the financial aid form. And, the distribution can reduce the financial aid package by 50% of the distribution.

This means, if your grandchild was to get $10,000 of aid, a $10,000 distribution could reduce their aid by $5,000.

Having the parent own the account might be a better option.

Parent owned assets do count towards the expected family contribution. But, their impact may not be as great as the distributions from the grandparent owned account.

Only 5.64% of the value of a parent owned account counts against a financial aid award. In number terms, a $10,000 account will only reduce the aid award by $564. On top of that, distributions from a parent owned 529 plan won’t count as income either.

If you, as the grandparent, own the 529 account, you need to plan the timing of the distributions. This means, the distributions should happen in the final two years of college.

Other Financial Aid Traps

This also brings up a couple of other things which could impact a financial aid award.

Sizable Gifts from a grandparent also get treated as income to the student on the FAFSA form.

Parents who tap into a Roth IRA to help their kids pay for college can also cause a problem with financial aid. Those tax free distributions count as income on the FAFSA.

Those items could reduce the amount of the financial aid award by 50% of the distribution or gift.

Helping your grandchildren save for college is a tremendous gift. The future costs will be staggering for certain. But it is worth looking at the big picture before you open an account.


Ohio’s 529 Plan

Click the button to visit the website for Ohio’s 529 Plan

West Virginia’s 529 Plan

Click the button to visit the website for West Virginia’s 529 Plan

Watch Other Episodes of Monday Morning Money

Catch up on the previous episodes of our weekly video series, Monday Morning Money.  You can also see them on our facebook page and our YouTube channel.

Creating Your Financial Safety Net

Creating Your Financial Safety Net As America begins to reopen, we can set our sights on what we need to do to get our financial situation back in order. What
Read More

4 Ways The Pandemic Could Impact Social Security

4 Ways the Pandemic Could Impact Social Security Social Security is the cornerstone of retirement income for many Americans.  Have you wondered if the Coronavirus outbreak will impact your benefits?
Read More

What the Heck is a V Shaped Recovery?

What the Heck is a V-Shaped Recovery? With many states creating plans to reopen the economy, we keep hearing about the recovery. Experts continue to weigh in on what it
Read More

Is The Bear Market Over?

Is the Bear Market Over? On March 23, the S&P 500 closed 34% lower than it’s all time high. Since then, we’ve seen prices rebound nearly 27%. It has many
Read More