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With the price of higher education increasing nearly eight-times faster than wages, saving and paying for college is a common concern for many families. While there are multiple ways to begin saving for educational expenses, 529 plans are the most common. These plans are tax-advantaged investment accounts specifically designed to encourage saving for future education costs.

But when it comes to ownership of 529 plans, questions from clients are extremely common. Whose name should the 529 plan be in? Does it matter if the owner is a parent versus a grandparent? The answer is “yes” – but the impact differs for account ownership versus distributions made from these plans.

Parent versus grandparent-owned 529 plans

Parent-owned 529 plans are treated differently than grandparent-owned 529 plans when applying for financial aid and completing the free application for student aid (FAFSA). A 529 plan owned by a dependent student or custodial parent is considered a parental asset set aside for education that must be reported. In contrast, grandparent- (or other relative-) owned 529 plans do not have to be reported on the FAFSA. Therefore, money sitting in these accounts will not affect a student’s financial aid eligibility.

But before recommending a change in ownership to maximize aid, plans for distributions to pay for college expenses need to be discussed. When a 529 plan is owned by a parent or student, distributions are ignored. But when distributions from a 529 plan occur from an account owned by a grandparent or other relative, it is considered untaxed student income, which is important because income carries a much more significant impact on aid eligibility than assets. This income can reduce eligibility for need-based aid by as much as half of the withdrawal.

The timing of distributions can also affect this impact. When completing the FAFSA, there is a two-year “look-back” period. For families filing the FAFSA in fall 2020, they will be completing this form using 2018 tax data. For a student attending a four-year university, grandparent-owned 529 plan distributions used to pay for expenses in their first few years of college will impact FAFSA filings for their later years. To avoid reporting income for grandparent-owned 529 plans, consider waiting until after January of the student’s sophomore year to make distributions.