Wayne Independent - Honesdale, PA
Boomers Fall 2019
- Page 8
College continued from page 26
in the future or affect your retirement plans. While financial conversations are uncomfortable, if you’re planning on a contribution, let the grandchild’s family know so you can coordinate funding together, Schacht said.

Don’t just write a check

While it may seem simple to just write a check, a monetary gift will lower the amount of financial aid a college student can receive, Schacht said. The Internal Revenue Service views any money that comes from outside the household as a gift. In 2019 grandparents can gift a grandchild (or other person) up to $15,000 without that person being taxed.

“However, that monetary gift to your grandchild will count as untaxed income, which may reduce his or her aid eligibility on their FAFSA,” or Free Application for Federal Student Aid, Schacht said.

Open a 529

Because of its appealing tax advantages, flexibility and lack of impact on financial aid, a 529 education savings plan is one of the most popular options.

“The tax benefits are great. Earnings on investments and withdrawals are federal income tax-free if the funds are used for qualified educational costs,” Schacht said. At the college level, 529 funds can be used to cover tuition, books, fees, supplies and more.

There is a loophole: Once funds are withdrawn to pay for tuition, that money is considered untaxed income to the student on the subsequent year’s FAFSA. Because of this, Schacht suggests holding off on 529 distributions until the student has entered his or her junior year and has filed their last FAFSA.

Other options

Other downsides of 529 plans are that they offer limited investment options and penalties for certain withdrawals. A Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account typically offers more investment options than 529 plans, but involve turning control of the account over to the student when he or she reaches a specific age.

Coverdell Education Savings Accounts (ESAs) offer a whole different set of pros and cons. The upshot: Take the time to learn all your options before you make a decision.