Q: The timing of last week's article ["Lots of options for gifting to their granddaughter"] was very good and thank you for the information. So a couple of follow-up questions: Does each grandchild need their own 529 account or can a grandparent have them all in one account? Also, what if the kid doesn't want to further their education or something tragic happens?
A: Like all tax-advantaged benefits, there are plenty of twists and turns when it comes to 529s. Before opening up a 529, I would consult with two excellent resources. They are Finaid.org, founded by Mark Kantrowitz, and Joseph Hurley's savingforcollege.com. Both clearly lay the basics of 529s while still dealing with the complexity of the savings vehicle.
That said, a 529 plan comes with a number of advantages. Among them: You open an account and control it on behalf of a beneficiary, your future student. On the federal level, the account is funded with after-tax dollars. With some key restrictions, many states allow for a deduction on state income taxes. The money grows tax-deferred from both federal and state taxes. When you withdraw the accumulated savings, it's free of federal taxes so long as it goes toward qualified educational expenses. Most states also allow for tax-free withdrawals. Qualified educational expenses include a wide range of expenses, such as tuition, mandatory fees, books and supplies.
You can own an account in any state. If you live in Minnesota and decide that you like California's 529 plan, you can open an account in the Golden State — and vice versa. The accumulated savings are available to be spent at any accredited college in any state. Anyone can contribute to a 529 account, including parents, grandparents, uncles, aunts and friends.
So what if the child or grandchild doesn't need the money to go to college, doesn't want to go to college or tragedy strikes? If the child decides college isn't for them or they can't go to college, they don't have access to the money. Instead, you can change the beneficiary without triggering taxes or penalties if it goes to a "member of family." The member of family designation is broad enough that in most cases it's a no-fuss, no-tax, no-fee maneuver. If the account is transferred to nonfamily members or you need the money to meet other expenses, you'll pay income taxes and a 10 percent penalty on any gain.
Which leads to another question: Was I was right when I said last week that grandparents should know that "the financial aid impact of a 529 is minimal"? To clarify, the simplest way to manage these accounts is to have them in the parent's name. (These examples all involve FAFSA; many expensive independent colleges add their own rules.) The financial aid formula treats the 529 in a parent's name as a parental asset, meaning the student's eligibility for federal financial aid will decrease by no more than 5.64 percent of the account's value. If the account is in a grandparent's name it won't initially affect the grandchild's eligibility for need-based financial aid. However, when that 529 account is tapped it affects the following year. For example, if the account is used freshman year it is considered a student asset for subsequent years and student assets are assessed at a flat rate of 20 percent.
Parents and grandparents should consider 529s, but they are complex. Sometimes it's simpler to keep the money in a taxable account and help out when the college tab is due.
Cris Farrell is economics editor for "Marketplace Money." His e-mail is email@example.com.