Grandparents keep mentioning a 529. What is the best pay to prepare for huge college costs for a tiny child right now? Thanks
The big downside to a 529 is that if your child doesn’t go to college, or drops out before the money is spent, you’ll have to pay a 10% penalty to take the money out. Or you’ll have to make someone else the beneficiary and not benefit from the savings at all.
Are the grandparents planning on funding the 529? Or are they just suggesting it as a vehicle for you to use?
I think for financial aid planning purposes, you might want the grandparents to have the final year of tuition saved in a 529. If you use it earlier, it counts as income and can mess up subsequent year’s aid qualification. Double check, this stuff keeps changing.
Check out Savingsforcollege.com for the basics on 529 accounts, and morningstar recently published their annual rankings of the different state plans.
Xerty, one way to avoid the financial aid implications of a grandparent 529 is for the grandparent to gift the money to the parent, who then puts the money into a 529 themselves. This of course creates new issues (the grandparent losses control of the funds, grandparent can not change the beneficiary to a different grandchild, the parent would receive any state tax deduction, etc) but is an option to consider depending on situation. .
But then it counts as a parental asset for aid purposes.
Like I said, it depends on the situation. Example: If the Grandparents are paying for more than just the last year of education it would be better for the money to come from a parents’s 529 (a parental asset counted at 5.64% for aid purposes) or even a 529 owned by the student himself (also a parental asset so long as the student is still a dependent) than the Grandparents 529 (which is considered income to the student and counted at up to 50% for aid purposes).
We need to open one as well. How do you decide how much to contribute each year? That would suck if you accumulated like 100k and your kid joins the military or something.