Withdrawals from 529 educational accounts owned by grandparents and others outside the nuclear family will soon have no impact whatsoever on federal financial aid eligibility due to new changes to the forthcoming simplified Free Application for Federal Student Aid (FAFSA). Previously, those withdrawals had to be reported two years later on the FAFSA as student income. Read here for more information on how 529 educational accounts impact financial aid.

This means funds in grandparent 529 plans won’t be counted at all — not when the FAFSA is filled out and not later when distributions are made to cover eligible college expenses.  Keep in mind, however, that grandparent 529 plans are still considered on the CSS Profile (an additional financial aid form used by about 200 private colleges to award their institutional aid).

The new FAFSA form will not be released until October 1, 2022, therefore, until income reporting changes take effect, grandparent 529 plan distributions may count as untaxed income on a student’s FAFSA. We will keep an eye out for when this new rule will apply to your situation and plan. 

With a 529 plan, you can build an educational legacy for your grandchild while taking advantage of tax and estate planning benefits.  If you want to find out more about 529s or how these new rules may apply to your situation, give us a call.

Sources: JP Morgan, Forbes, and Savingforcollege.com

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