PPA Gives 529 Plans A Boost

For families pulling in less than $50,000 a year, 529s are probably not the best way to fund their kids’ education, says Munro, who is the author of 529 And Other College Savings Plans For Dummies. “529s mostly benefit people who can afford 4 years of college and expect to contribute to the full cost.”

Get relatives into the act. If a parent doesn’t have the income to make significant contributions, a grandparent or another relative may be willing to get the ball rolling with a lump sum contribution.

“When they put $25,000 in early in a 529 and let it compound, you get tax-free compounding,” notes Loewe. “So some grandparents put a lot of money up front to get the 529 started. Some grandparents also like to do match plans, where they put in $1 or 50 cents for every $1 the parent puts in.”

Coghan adds that pulling relatives into supporting a plan often carries a bonus for the advisor.

“It’s an opportunity for the advisor to build his business and develop relations with a grandparent, aunt or uncle as a trusted source of financial information,” he says.

For many grandparents, a 529 can afford an opportunity to shield retirement income they don’t need from taxes, Coghan says.

“Grandparents may have to take a required minimum distribution from their retirement account,” he explains. “Many aren’t looking to use this money immediately, and a 529 contribution is one way to redeploy it. They pay the tax, but then they can put it right back into a tax-advantaged account. So rather than take a $10,000 required minimum distribution, put it into a 529, where it grows in a tax-free way.”

Involving grandparents and other relatives also has an advantage for parents applying for financial aid, notes Munro.

“Those relatives have finished putting kids through school, but they may have deep enough pockets to put a grandchild through school as well,” she says. “Even if they can’t fund the whole tab, the 529 plan they sponsor won’t have an impact on the parents’ application for aid because the grandparent owns the plan, and the parents don’t have to report it as assets.”

Other pointers. Margaret A. Munro also offers these recommendations:

–Suggest a 529 for a parent’s continuing education, which can pay off in higher income. “I have a 529 plan and a husband in school, and I took some of money from our kid’s fund to help pay for that, and it worked really well,” Munro says.

–Consider applying to colleges far from home. Every college wants a diverse population of students, Munro points out. A child from small state such as Vermont is likely to get stronger incentive aid offers from schools in, say, California or Idaho because most schools want at least one kid from every state, she says.

“Student aid packages they’re getting from schools far afield are much better than those from Vermont schools,” she says.

–Start spending for college early. Reducing a parent’s or child’s assets can pay off by allowing them to qualify for higher financial aid, Munro points out.

“For instance, buy a computer for college in the junior year of high school rather than the senior year. Or put that money into buying a car for the student, so it is out of your account before you file for aid.”

By the same token, urge clients to pay down credit cards and other debts, she advises. “The parent has to pay those debts, but FAFSA [Free Application For Federal Student Aid] doesn’t look at that when it calculates how much aid you need.”