Ask Terry Questions 529 savings plan for Grandparents

529 savings plan for Grandparents

By Terry Savage on November 25, 2019 | College Savings / Student Loans

Hi Terry, I have three grandkids, ages 2 1/2 to 3 months old. My wife will be retiring in May at age 63. I am newly retired with a IMRF Pension, my wife will have TRS pension. I will start taking my Soc Sec in February when I turn 64. We are in great financial shape, house paid, cars paid off, college paid off for our three daughters. We are lucky to have more money coming in than we need. I want to start putting the $2000 plus Soc Sec money that I will start receiving each month into a College fund for the three Grand kids. I assume the money will grow tax free, then I or my grandchild will be taxed when the time comes to use the money. Are there any tax considerations, or specific plans that you recommend? Do you recommend just investing the $ in the S&P 500, or do you have a Portfolio to diversify? Should I wait until this Bull Market ends, then Invest? Thanks for any advice you can offer.

Terry Says

Well, that question has a nice ring to it — I always like to hear from people who think they have “more than enough” retirement income. But before you start giving away your retirement income in that magnitude, I think you should do a bit of financial planning. Have you considered healthcare costs in retirement? According to Fidelity, a 65-year old couple retiring in 2019 can expect to spend $285,0001 in health care and medical expenses throughout retirement, compared with $280,000 in 2018. And those costs will only rise!

That doesn’t include the cost of long-term custodial care, which could be more than $5,000 per month even at home! You might want toconsider purchasing a combined long term care/life insurance product to cover those costs — and if you die without using them, leave the money to your grandchildren to pay off their student loans. Just saying that when you retire there are always unexpected costs –from home repairs to health issues, to rising prices for uncovered medical expenses. Not to mention the general impact of inflation on everyday living expenses. A session with a FIDUCIARY fee-only financial planner might be helpful in giving you a better picture. Find one at

And, finally, to answer your original question. I think a 529 College Savings Plan is a great idea. Your state may even give you a tax deduction against state income taxes for your contribution. Otherwise you don’t get a deduction — but all the money grows tax-free if it is used for college by any child in the family. When a grandparent owns the 529 plan it is not counted as an asset if the family applies for financial aid. BUT when money is withdrawn and used to pay for college, then it is considered a STUDENT asset in that year — making it very difficult to qualify for aid in the following year! So if the family is applying for financial aid, the money in the grandparents plan should be saved for the4 last year, or last two years, of college so it will pay for everything and not impact any student aid.
As for how to invest, most plans have an age-based formula that grows more conservative over the years. But given our current long bull market, I’d take the most conservative choice now for any student who is in 8th grade or older and has less than 5 years before the money is needed.

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