narayan
There are many ways financial advisors can help their clients who are grappling with the looming cost of college. But 529 plans are the top college savings topic clients ask about.
Below, I answer the most common and not-so-common 529 account questions advisors may field:
1. Can I transfer the 529 accounts for my kids to my parents so the money won’t be counted in the Free Application for Federal Financial Aid formula?
This is a common question lately because the rules regarding college contributions from grandparents, aunts, uncles and any other outsider no longer count in the aid calculation as the student’s untaxed income. For instance, in the past, if a grandparent had paid $20,000 to defray a child’s college bill, that would reduce the potential aid the student received. Now outsiders can contribute any amount toward paying the college tab, and assistance won’t even be reported.
In contrast, the FAFSA assesses money in 529 accounts held by parents at up to 5.64% for financial aid purposes. So, you can see the allure of parents wanting the ownership of their college nest egg transferred to grandparents, where the money will essentially be hidden. Some people may regard this strategy as unethical, but it isn’t illegal.
Some state 529 plans allow a change in account owner, but other states only permit this change when there is a divorce or death. So, the ability to change the account owner to the in-laws or grandparents will vary by state.
Assuming the account ownership is changed, there are some issues to consider. Parents, for starters, would lose all control of this money. If a grandparent or uncle, for instance, wanted to use the money for some other purpose, nothing could stop them.
Here is something else to think about: Owning this asset could hurt a grandparent’s ability to qualify for a nursing home or other long-term care using Medicaid. If the grandparent used the 529 money to pay for a grandchild’s college costs within five years of seeking assistance, Medicaid could withhold that amount of money.
Parents also need to understand that this ownership change strategy won’t work for the nearly 200 private institutions that also use the CSS Profile financial aid application. These schools, which include the most highly sought-after ones, ask whether any outsiders have helped with college costs in the relevant base year. Some CSS Profile schools even ask if there are any 529 accounts in existence from outsiders such as grandparents, godparents and others.
2. What 529 expenses are allowable with 529 plans?
This is an understandable question since the list of qualified costs expands periodically.
Here are qualified 529 uses to pay for college costs:
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Tuition and fees at any accredited college or trade school that participates in the federal financial aid system
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Room and board on campus or off campus that would include rent, utilities and groceries. The off-campus cost can’t exceed the school’s published cost of attendance
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Books and required supplies, such as lab materials
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Computer, printer, Internet service, software as long as it’s primarily for educational use
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Disability-related expenses
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Study-abroad programs if offered through an accredited U.S. institution
Here are expenses that you can’t use 529 plans to pay for:
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Transportation including gas, parking, travel to and from campus
3. What are the rules regarding 529 rollovers to Roth IRAs?
A fairly new 529 question that advisors are getting revolves around the ability to transfer the unused portion of a 529 into a Roth IRA for the beneficiary without triggering taxes or penalties. This became an option at the start of 2024.
Here are some federal rules for safely making the transfer:
The lifetime amount that your client can transfer is $35,000.
The maximum that can be rolled over annually can’t exceed the annual Roth IRA contribution limit, which is $7,500 for 2026 and $8,600 if age 50 or older.
The 529 account must have existed for at least 15 years for the designated beneficiary.
One question I’ve received is whether changing a 529 beneficiary would restart the 15-year clock. Unfortunately, the IRS has not provided guidance on this yet.
The 529 account’s beneficiary must also be the owner of the Roth IRA. As with all Roth IRAs, the owner must have earned income equal to or greater than the amount being rolled over.
The income limits on Roth IRAs, however, don’t apply for rollovers, so even beneficiaries with high incomes can take advantage.
The transfer from a 529 account to a Roth IRA rollover must be a direct trustee-to-trustee rollover.
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