As a grandparent, you want to help your grandchildren succeed in life, and education is a big part of that. While college is important, it is also expensive. Many students cannot afford college, so they look to pay for it with loans, grants and scholarships. But if you can help your grandchildren avoid being burdened with student loan debt (that can often last for years after graduation), consider contributing to a 529 savings plan.
Rather than giving your grandchildren money throughout the year that they can spend anywhere, opening a 529 account lets you retain control of how the money is used. You also have the option to accelerate gifting, by contributing a larger amount up-front.
Regular 529 Gifting Contributions
If you are looking to reduce your taxable estate, you can contribute up to $15,000 per beneficiary (i.e. child or grandchild) per year. Married couples can contribute up to $30,000 per year.1
| Date | Tax Year | Type | Amount (Individual) | Amount (Married) |
|---|---|---|---|---|
| Today | 2018 | Current Year | $15,000 | $30,000 |
Accelerated Gifting Contributions
Looking to contribute more than $15,000? You may contribute up to $75,000 in one year ($150,000 if a married couple) per beneficiary (i.e. child or grandchild) and treat it as if it were made over a 5-year period, free of federal gift tax, so long as no other contributions are made to the same beneficiary in that 5-year period.1
| Date | Tax Year | Type | Amount (Individual) | Amount (Married) |
|---|---|---|---|---|
| Today | 2018-2022 | Current Year | $75,000 | $150,000 |
| 2018 | Accelerated Year | $15,000 | $30,000 | |
| 2019 | Accelerated Year | $15,000 | $30,000 | |
| 2020 | Accelerated Year | $15,000 | $30,000 | |
| 2021 | Accelerated Year | $15,000 | $30,000 | |
| 2022 | Accelerated Year | $15,000 | $30,000 |
Best of all, when contributing to a 529 account even though the money is generally removed from your taxable estate, you retain control over the account. 1
Because contributions to 529 plans are generally considered completed gifts for federal gift, estate, and generation-skipping tax purposes, they qualify for the $15,000 ($30,000 if a married couple) per beneficiary annual exclusion from gift taxes. In addition, you may contribute up to $75,000 in one year ($150,000 if a married couple) per beneficiary and treat it as if it were given over a 5-year period, free of gift tax, so long as no other contributions are made to the same beneficiary in that 5-year period.
Tax benefits are conditioned on meeting certain requirements. Federal income tax, a 10% federal tax penalty, and state income tax and penalties may apply to nonqualified withdrawals of earnings. Generation-skipping tax may apply to substantial transfers to a beneficiary at least two generations below the contributor. Federal tax law provides that up to $10,000 per year may be withdrawn from a 529 savings plan federal income-tax free, if used for tuition expenses at private, public or religious primary and secondary (K-12) schools. It is not clear what public K-12 school costs, if any, will be regarded as tuition for this purpose. Additionally, amounts paid as principal or interest on certain existing loans of the Beneficiary or their sibling, subject to various limits including annual limits, can constitute qualified distributions. State tax benefits and treatment of withdrawals for K-12 tuition and loans may vary by state, may not have been updated for changes in federal tax law and may be uncertain; consult a tax professional concerning your state. Gift examples are general; individual financial circumstances and state laws vary--consult a tax advisor before investing. If the contributor dies within the five-year period, a prorated portion of contributions may be included in their taxable estate. See the Investor Handbook for more complete information.
Helpful Hint
As a grandparent, to avoid your contributions being counted toward your grandchild's income on the FAFSA (student income is assessed at 50% and counts toward the EFC, which can affect financial aid), consider waiting to withdraw funds until later college years. Always consult a tax professional to determine what strategy is optimal for your saving situation.
Investors should carefully consider plan investment goals, risks, charges and expenses before investing. To obtain the Investor Handbook, which contains this and other information, call Franklin Templeton Distributors, Inc., the manager and underwriter for the plan, at (877) 4NJ-BEST. You should read the Investor Handbook carefully before investing and consider whether your or the beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in its qualified tuition program.
- Federal tax law provides that up to $10,000 per year may be withdrawn from a 529 savings plan federal income-tax free, if used for tuition expenses at private, public or religious primary and secondary (K-12) schools. It is not clear what public K-12 school costs, if any, will be regarded as tuition for this purpose. Additionally, amounts paid as principal or interest on certain existing loans of the Beneficiary or their sibling, subject to various limits including annual limits, can constitute qualified distributions. State tax benefits and treatment of withdrawals for K-12 tuition and loans may vary by state, may not have been updated for changes in federal tax law and may be uncertain; consult a tax professional concerning your state.
This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor, investment professional or insurance agent. Before making any financial commitment regarding a Section 529 college savings plan, consult with the appropriate financial advisor.
NJBEST New Jersey’s 529 College Savings Plan is offered and administered by the New Jersey Higher Education Student Assistance Authority (HESAA); managed and distributed by Franklin Templeton Distributors, Inc., an affiliate of Franklin Resources, Inc., which operates as Franklin Templeton Investments. No federal or state guarantee. Principal value may be lost, and investing in the plan does not guarantee admission to any particular primary or secondary school or to college or sufficient funds for primary or secondary school or for college. Please refer to the Investor Handbook for more complete information.
See the Investor Handbook for more information on NJBEST 529 College Savings Plan, including sales charges, expenses, general risks of the Plan, general investment risks and specific risks of investing in Plan portfolios, which can include risks of convertible securities; country, sector, region or industry focus; credit; derivative securities; foreign securities, including currency exchange rates, political and economic developments, trading practices, availability of information, limited markets and heightened risk in emerging markets; growth or value style investing; income; interest rate; lower-rated and unrated securities; mortgages, asset-backed and credit-linked securities; life settlement investments; restructuring and distressed companies; securities lending; smaller and midsize companies; and stocks.
