Tag: #529 - Benefit Financial Services Group

New FAFSA Rules Around Grandparent Owned 529 Plans

By: Henry VanBuskirk, CFP®, Wealth Manager

One of the biggest decisions that a person about to graduate from high school can make in life is whether or not they choose to go to college. That’s also why it’s no coincidence that when toymaker Milton Bradley was designing the board game, The Game of Life®, one of the first things you do in the game is to decide whether or not your character will go to college.¹ In the real world, electing to go to college is not as easy of a decision. The actual game of life is much more complicated. Going to college means a significant financial cost for you and your loved ones that has outpaced inflation over time. To highlight this, take the University of Pennsylvania’s tuition and associated expenses in 1960 (the year that the board game Life® was published).

Now fast forward to the 2020-2021 academic year for the University of Pennsylvania and the price tags have increased drastically:

I’m not here to preach one way or the other on whether or not this is wrong. I’m just here to point out that this is the reality we live in. If you went to college in the early 60s, imagine what life was like for you. If you have grandchildren, chances are that you want them to have a better start to the game of life than you did. If their parents do not have the means to fund college, then they will have to use student loans and fill out the FAFSA (Free Application for Federal Student Aid) to receive financial aid to help pay for those post-secondary education goals.

You may want to contribute to an investment vehicle to help them save for college. The most popular investment vehicle for saving for future college expenses is the 529 plan. There have been new changes to the 529 plan and how it interacts with the FAFSA form. My goal today is to show you how you can take advantage of these new changes to help your grandchildren have a better opportunity to graduate from college and have a fulfilling career of their choosing.

What is a 529 plan?

A 529 plan is an investment account that is sponsored by states, agencies, or investment companies, that grows tax-free, and distributions can be tax-free as long as the distributions are made to pay for qualified education expenses (such as tuition or room and board). In 2023, you can contribute up to $17k per person, per beneficiary. There is also the option to “superfund” a 529 plan, which would be making 5 years of contributions to the 529 plan in one year. This is where you can put $85,000 into the 529 in year one (5 * $17,000) but cannot make additional contributions until year 6. This can also be used to help mitigate the size of your taxable estate at the time of your death. However, careful planning must be done since if the 529 plan is super funded and you pass away within the 5 years of super funding, the 529 plan as the contribution would then be added back to your estate.

The FAFSA Rules

The old FAFSA Rules when it came to grandparent-owned 529 plans were that distributions from the 529 plan would be counted as non-taxable income to the student and 50% of the distributed value would impact potential financial aid. This would impact the Expected Family Contribution (EFC), potentially meaning that less federal financial aid would be awarded to the student.

The new rules are that distributions from a grandparent-owned 529 plan are not counted at all towards FAFSA and are not considered non-taxable income to the student. The EFC is not impacted, and the grandparent-owned 529 plan is just assumed to not exist when it comes to awarding federal financial aid to the student. Keep in mind, however, that grandparent 529 plans are still considered on the CSS Profile (an additional financial aid form used by about 200 private colleges to award their institutional aid).

The rules for a parent-owned 529 plan are that the first $10,000 of a 529 plan account is excluded from FAFSA and only 5.64% of the account’s value above $10,000 is factored into the EFC when filing the FAFSA and determining any potential federal financial aid.

What does this mean for you?

If education planning is important to you and your family, it may be more beneficial to focus on having a greater balance in a grandparent-owned 529 plan rather than a parent-owned 529 plan. There also may be options to change the owner of a 529 plan from a parent to a grandparent, depending on the state that your 529 plan is in. If you have both a parent-owned and a grandparent-owned 529 plan, it is important to coordinate the distributions from each account for the optimal financial aid available for the student. Due to the new Secure Act 2.0, there is also the ability to roll over up to $35,000 of funds in a 529 plan to a Roth IRA for the beneficiary if the beneficiary chooses not to go to college. The funds had to be in the 529 plan for at least 15 years to take advantage of this and the amount that can be rolled over each year is subjected to the annual Roth contribution limits.

Conclusions

As a grandparent, now your grandchildren have all of the tools they need to succeed in any post-secondary education that they choose. You sit down with your grandchild, explain that you started a 529 plan to save for their future post-secondary education goals, and they give you a hug since they know that they can fulfill their dreams now because of you:

Ok, maybe some dreams should be scrutinized. I’m guessing you probably don’t want your legacy walking around in oversized shoes, wearing multicolored overalls, and donning a large fake red nose (and I’m not here to judge if that is what you want for your legacy).² If you wish, you can also change the beneficiary on the 529 plan at any time and as often as you like. Since Bart isn’t planning on using the funds in the 529 plan wisely, it may be prudent for you to change the 529 plan beneficiary to his more responsible sister, Lisa:

While Bart is upset that he won’t get any funds from the 529 plan (he’ll just need to pull himself up by his oversized bootstraps and work hard to finance his Clown College tuition), you and Lisa are ecstatic to learn how the new FAFSA rules for grandparent-owned 529 plans and how you contributing to a grandparent-owned 529 plan can bolster your grandchild’s future educational endeavors and help instill your personal morals and values to the next generation.³

Legacy planning is one of the most important financial planning topics that we address with our comprehensive financial planning services. If you are in a comfortable financial position where you are looking to help others in your family succeed by passing on your personal morals and values, we can help you fulfill those goals. To summarize, I would like to point out this chart from the National Center for Education Statistics:

To reference another board game from my childhood (this time from Hasbro), don’t take the Risk® of waiting to discuss your grandchildren’s future education needs with your family and your financial planner.⁴ The above chart shows that delaying this conversation means funding future education goals will only become more difficult over time. That hurdle can be conquered by setting up an investment vehicle like a 529 plan to fund future education expense needs now. Our team of Certified Financial Planner™ (CFP®) professionals is here to construct your comprehensive financial plan and be a sounding board for you to voice how you want your family legacy to be remembered by future generations. We’re here to help you win at this game of Life® (at least financially) and the first step to playing is by giving us a call at 714-282-1566 or emailing us directly at financialplanning@bfsg.com to schedule an appointment with our team.

Footnotes:

https://en.wikipedia.org/wiki/The_Game_of_Life. Also sometimes called Life®.
Bart from The Simpsons
Lisa from The Simpsons
https://en.wikipedia.org/wiki/Risk_(game)

Sources:

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

SECURE Act 2.0 Offers New Options for 529 Plans and Student Loan Payments

In December 2022, Congress passed the SECURE Act 2.0. It introduced two new rules relating to 529 plans and student debt that will take effect in 2024.

The first provision allows for tax- and penalty-free rollovers from a 529 plan to a Roth IRA. The second provision allows student loan payments made by employees to qualify for employer retirement matching contributions. The overall goal is to help young adults start saving for retirement.

New 529 Rollover Option

529 plans are tax-advantaged savings accounts specifically geared to saving for college. In an effort to broaden the flexibility of 529 plans in situations where families have extra funds in an account, Congress created a new rollover option.

Starting in 2024, 529 plan beneficiaries can roll over up to $35,000 to a Roth IRA over their lifetimes. The rollover is not subject to taxes or a penalty that would typically apply to a non-education use of funds. This new rollover option can allow a young adult to get a head start on saving for retirement.

Here’s how it will work:

The beneficiary of the 529 plan must be the owner of the Roth IRA.
Any rollover is subject to annual Roth IRA contribution limits, so a beneficiary can’t roll over $35,000 all at once. For example, in 2023, the Roth IRA contribution limit is $6,500 (for people under age 50) or earned income, whichever is less. If the limit remains the same in 2024, a beneficiary would be able to roll over up to $6,500. If the beneficiary earns $4,000 in total income in 2024, then the maximum amount that could be rolled over is $4,000.
In order for the rollover to be tax- and penalty-free, the 529 plan must have been open for at least 15 years. If the 529 account owner (typically a parent) changes the beneficiary of the 529 plan at any point, this will restart the 15-year clock.
Contributions to a 529 plan made within five years of the rollover date can’t be rolled over — only 529 contributions made outside of the five-year window can be rolled over to the Roth IRA.

New Option for Employer Treatment of Employee Student Loan Payments

In addition to making 529 plans more flexible with a new rollover option, the SECURE 2.0 legislation seeks to help employees who have student loans and are making monthly loan payments. Employees with student loan debt often have to prioritize repaying their loans over contributing to their workplace retirement plan, which can mean missing out on potential employer retirement matching contributions. Starting in 2024, employers will have the option to treat an employee’s student loan payments as payments made to a qualified retirement plan (student loan payments will be considered “elective deferrals”), which would make those contributions eligible for an employer retirement match (if the employer offers this benefit).

Our team of Certified Financial Planner™ (CFP®) professionalsis here to construct your comprehensive financial plan and help you start saving for retirement.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

CalKids and 529 Planning

By: Henry VanBuskirk, CFP®, Wealth Manager

If you are a new parent, your mind is probably swirling with a myriad of thoughts about your child’s future. Your head is likely ringing with questions that you need answers to like:

Do I have enough life insurance coverage?
What changes to my budget do I have to make to maintain our lifestyle?
How do I save for my child’s future education needs?

While our firm helps answer these questions and many similar financial-related questions for new parents on a regular basis, I would like to take some time to focus on question #3 – “How do I save for my child’s future education needs?”. The answer to this question is dependent on your philosophy when it comes to saving for your child’s future education needs. College education may be very important to you, you may want your child to go to a vocational school, or you may just want to make sure that your child has a nest egg to use at their discretion when they reach adulthood. If you are a California resident, the state of California has a new program called CalKids that can help answer part of this question. Before we discuss this state program, I would like to briefly go over the ways people traditionally invest and save for minors.

Investment vehicles that offer the most flexibility for the child are UTMA (Uniform Transfers to Minors Act) accounts or earmarking a taxable brokerage account owned by the parents that are for the child’s use when they become adults, but the parents maintain control of the account. UTMA accounts are considered gifts to the child and when the child reaches the age of majority (normally age 18), they become the rightful owner of the account and can use the proceeds on whatever they would like. Some people don’t like UTMA accounts since they pose a risk. Think about your mental state at 18. Would you want your child to receive that sum of money you saved for up to 18 years to go to your now 18-year-old adult child to spend it on whatever they wanted? Some people wouldn’t mind, but other people would. That’s where earmarking a taxable brokerage account owned by the parents comes in to play. The account owner would retain control of the account even after the child reaches age 18.

If you are gung-ho about making sure your child goes to college or vocational school, the 529 plan may be the best fit for you. The 529 plan allows for tax-free growth and tax-free withdrawals as long as the funds are used for qualified educational expenses such as tuition and room and board. With the new Secure Act 2.0 legislation that passed, up to $35,000 of unused funds can over time be rolled over into a Roth IRA in the 529 plan beneficiary’s name. This allows for some optionality for helping set up your child’s future success in education and/or retirement.

What do these investment vehicles have to do about the CalKids program? They all have one common thread. They are all just mechanisms to help save for your part of your child’s future goals, whatever they may be.

The CalKids program is a program that gives parents of children born on or after June 1, 2022, regardless of the parent’s income, up to $100 for that child to use for college, vocational, or professional schools. Here is the exact breakdown of how that $100 is awarded:

CalKids also offers additional funding for some students in grades 1 through 12 that are deemed in a low-income household by the state, as defined by the Local Control Funding Formula, can receive additional awards from the state:

The CalKids program works very similarly to a 529 Plan, where the funds are invested, grow tax-free and distributions are also tax-free if they are used for qualified educational expenses. Similar to a 529 plan, the investment growth on CalKids funds that aren’t used for qualified educational expenses are taxed at ordinary income with a 10% penalty. Even if you use the funds for items other than qualified educational expenses, if you have an eligible newborn signed up for the CalKids program, they still received that CalKids money for free. BFSG has helped thousands upon thousands of clients in our 30+ year history and we still have yet to find a person that objects to receiving free money. Even if you have no intent on setting up a ScholarShare 529 college savings account (California’s state 529 plan) and you have no reasonable expectation that your child would be identified as being in a low-income household, you can still get $50 from the state of California just for letting the state know you have an eligible newborn and are willing to register the account on the program’s online portal.

If you are planning on having your child go to college, private school, or vocational school and will therefore have tuition costs, utilizing the CalKids program and investing in a 529 plan could be instrumental in helping you reach the goals you have for your child’s future education needs. Educational planning is one of the main pillars of financial planning and might be your highest or lowest priority to you right now. Similar to a tax professional combing through the tax code to try to legally maximize your tax refund, our job as Certified Financial Planner™ professionals is to sift through current and pending legislation to educate you on how to legally maximize your potential for meeting your short-term and long-term financial goals through tailored investing strategies, efficiently using the tax code, and utilizing state and national programs when appropriate to help meet those future financial goals. After all, if you’re a California resident with a child born after June 1, 2022 (and you made it this far into the blog post), you just learned how you can be awarded up to $100 from the CalKids program regardless of your income level.

If you are interested in sitting down with our team of CFP® professionals to help you compartmentalize your financial goals through a comprehensive financial plan, please feel free to email us at financialplanning@bfsg.com or give us a call today at 714-282-1566.

Sources:

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

College Cost Data for 2022-2023 School Year

Every year, the College Board releases new college cost data and trends in its annual report. The figures published are average cost figures based on a survey of approximately 4,000 colleges across the country.

Over the past 20 years, the average price for tuition, fees, and room and board has increased 46% at public colleges and 30% at private colleges over and above increases in the Consumer Price Index, straining the budget of many families and leading to widespread student debt.

Here are cost highlights for the 2022-2023 year. This year, public colleges have done a better job than private colleges at keeping tuition and fee increases under 2.3%. Note: “Total cost of attendance” includes direct billed costs for tuition, fees, and room and board, plus indirect costs for books, transportation, and personal expenses.

Public colleges: in-state students

Tuition and fees increased 1.8% to $10,940
Room and board increased 3.0% to $12,310
Average total cost of attendance: $27,940

Public colleges: out-of-state students

Tuition and fees increased 2.2% to $28,240
Room and board increased 3.0% to $12,310 (same as in-state)
Average total cost of attendance: $45,240

Private colleges

Tuition and fees increased 3.5% to $39,400
Room and board increased 3.0% to $14,030
Average total cost of attendance: $57,570

Note: Many private colleges are at or approaching $80,000 per year in total costs.

Sticker price vs. net price

The College Board’s cost figures are based on published college sticker prices. But many families don’t pay the full sticker price. A net price calculator, available on every college website, can help families see beyond a college’s sticker price. It can be a very useful tool for students who are currently researching and/or applying to colleges.

A net price calculator provides an estimate of how much grant aid a student might be eligible for at a particular college based on the student’s financial information and academic record, giving families an estimate of what their out-of-pocket cost — or net price — will be. The results aren’t a guarantee of grant aid, but they are meant to give as accurate a picture as possible.

FASFA for 2023-2024 year opened on October 1

Even though the college cost data contained here is for the 2022-2023 school year, it’s already time to think about the following year. The Free Application for Federal Student Aid (FAFSA) for the 2023-2024 year opened on October 1. It’s important to keep in mind that the 2023-2024 FAFSA will factor in your income information from two years prior, which it will get from your 2021 federal income tax return, but it uses current asset information. Your income is the biggest factor in determining financial aid eligibility.

Check out our recent webinar, “College Planning: How to Afford the College of Your Dreams”, where we discuss how to apply for FAFSA and how to negotiate the best possible financial aid packages.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Best Account to Open for Your Kids Future

By: Paul Horn, CFP®, CPWA®, Senior Financial Planner

As parents we always want to see our kids succeed and do better than we did. This means many times we want to invest in their future for various things. Most of the time parents want to save for education, but there could be other reasons to save. For example, helping them buy their first home, seed money to start their business venture, or to pay for a wedding. Below are the most common account types and when it may be the best choice based on your goals for the money. Some may notice that the Coverdell (Educational IRA) is not listed and that is because it is no longer relevant given recent changes to the 529 Plan.

529 Plan: Best account for saving for education

Best used if you 100% know that the beneficiary is going to use the funds for college, post-secondary education, or private school.
For 2022, the max that can be contributed in one year is $16,000 per person per beneficiary (or $32,000 with gift splitting). There is also an option to superfund a 529 where 5 years of contributions are made in one year.
Contributions grow tax-free and distributions can be tax-free as long as they are used for qualified education expenses. Qualified education expenses include (but are not limited to) items like room and board, tuition, and books.
Contributions can be deductible at the state level depending on your state.
If the distribution is not for qualified education expenses, the earnings on the distribution are subjected to ordinary income taxes and a 10% withdrawal penalty.
You can switch the beneficiary at any time. Let’s assume you have money left over after the oldest child graduates; you can transfer this money to the next kid in college.

UTMA/UGMA (custodial account): Best account if you want your kid to have the money at 18 or 21 without any limitations

In 2022, this is an account where the custodian can contribute $16,000 per year to an investment account for a minor child. At the age or majority (usually age 18 but can be increased to age 21 or 25 in some circumstances), the minor child then becomes the owner of the account.
While the minor child is still listed on the UTMA (Uniform Transfer to Minors Act) account or UGMA (Uniform Gift to Minors Act) account, the earnings are subject to capital gains at the following schedule:
- The first $1,100 of unearned income is free from tax,
- The next $1,100 is taxed at the minor’s tax rate,
- Earnings above $2,200 are taxed at the parent’s tax rate.

When the account transfers to the minor child due to the minor child reaching the age of majority, earnings and distributions are taxed at capital gains tax rates.

2. Put money into a taxable account in your name – Best option for anything not education specific

There are no limits on how much you put into the account or how the money is used.
You maintain full control of the assets and determine when and how much they receive.
This is a taxable account, so it would be subject to regular taxes (i.e., interest income, capital gains, dividends, etc.)
If your kid(s) were to inherit the taxable account, the securities in the taxable account get a step up in basis to virtually eliminate any tax implications for them.
A taxable account has less impact on financial aid for your kid(s) than a UTMA/UGMA.
Money can be invested however you choose.
When you give the money to them it is considered a gift and limited to $16,000 per person or $32,000 for a married couple per year (2022). Any amount over this is reported on a gift tax return (no taxes are paid but it reduces your estate tax exemption).
If the money is used to pay tuition for a school directly or directly to medical bills, then the $16,000 limit does not apply.

Roth IRA: Best if saving for their retirement

Contributions to a Roth IRA can be made for a minor child as long as the minor child has earned income from working.
For 2022, contributions are limited to $6,000 or the amount of earned income (whichever is lower). Assume they make $3,000 from a summer job, then you are limited to contributing $3,000.
A parent can put money into the Roth IRA for the kids to allow the kids to keep their income they earned.
Contributions grow tax-free and distributions can be tax-free if the owner (the minor child) is at least age 59.5 and the contributions have been in the account for at least 5 years. If not, earnings on the distributions are subject to ordinary income tax and subject to a 10% early withdrawal penalty. There are some instances where the 10% early withdrawal penalty can be waived that include (but are not limited to): buying your first home (up to $10k), college tuition, or permanent disability.

As you can see, there are many options available to you and the best account depends on what your goals are. You can reach us at financialplanning@bfsg.com if you would like to have a complimentary call to discuss your specific situation.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

#529

New FAFSA Rules Around Grandparent Owned 529 Plans

SECURE Act 2.0 Offers New Options for 529 Plans and Student Loan Payments

CalKids and 529 Planning

College Cost Data for 2022-2023 School Year

Best Account to Open for Your Kids Future

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