Whatever the reason, you always have a good excuse to make a contribution to your grandkids’ 529 education savings plan. It’s a great gift that can help them realize their educational and professional goals—and it can help you, too. With a grandparent-owned 529 plan, you control the investments, and distributions for qualified educational expenses are federally tax free.1
Impact on financial aid eligibility is expiring
Starting in the 2024/2025 school year, qualified distributions from a grandparent-owned 529 account will no longer be reported as untaxed income to the beneficiary. And since the Free Application for Federal Student Aid (FAFSA) uses income from two years prior to determine aid eligibility, grandparent-owned 529 accounts will no longer affect financial aid beginning in 2022.
Previously, any qualified distribution from a 529 plan owned by a grandparent for the benefit of a grandchild counted as untaxed income to the beneficiary. There were a number of strategies to mitigate it, including holding off on using distributions from the 529 until the student is in the second semester of his or her sophomore (if graduating in four years) or junior (if graduating in five) year.
Now grandparents can open and maintain a 529 without worrying about FAFSA eligibility.
Tax and estate tax benefits
Contributions to a 529 plan are considered gifts for tax purposes, and gifts can be made with excess required minimum distributions from retirement accounts or from other sources. For 2022, contributions of up to $16,000 per individual—$32,000 per married couple filing jointly—qualify for the annual gift tax exclusion. What’s more, you can gift as much as $80,000 individually and $160,000 jointly to a 529 plan at one time if the contribution is treated as if it were spread over a five-year period. Please note that the amount contributed must be reported on IRS Form 709 for each of the five years.
In 2022, individuals can gift up to $12.06 million over their lifetime without having to pay federal estate or gift tax. Contributing to a 529 account will allow you to shelter a large amount of your assets from estate taxes while retaining control of the funds in the account. Please note that if you end up changing your mind down the road and revoke the funds in the account, they’ll be added back to your taxable estate. There’s no joint gift tax return, so you and your spouse will each have to file separately. Also note that the estate and gift tax exemption will expire in 2025, and the exclusions may be reduced to approximately $5 million (adjusted for inflation).
Before investing in a 529 or other beneficiary account, be sure to check with your tax, estate planning, and/or financial professional.
1 State tax laws and treatment may vary. Earnings on nonqualified distributions are subject to federal and applicable state income taxes and a 10% federal penalty tax. Please consult your tax or financial professional for more information.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds.
John Hancock Retirement Plan Services LLC offers administrative and/or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York), and John Hancock Life Insurance Company of New York, Valhalla, New York. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC.