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Grandma gets the 529 ready

By Jennie L. Phipps ·
Sunday, February 19, 2012
Posted: 6 am ET

My friend is about to be a first-time grandma, and she's already saving for the soon-to-arrive boy's college education -- a pleasant retirement planning job.

Since we first got to be friends 35 years ago, when she was pregnant with the father of this little fellow, I have a vested interest in making sure she does the right thing. So this week, we studied up on the possibilities and decided on a 529 plan  she will set up and maintain in her name.

Here's a few key reasons we chose what we did:

  • The money saved in this plan will remain in my friend's name and under her control. Initially, she is naming the soon-to-arrive baby as the beneficiary, but if he is a football player and gets a college scholarship like his daddy did, the rules for 529 plans would allow my friend to transfer the money to a player to be named later -- like a sister.
  • Money saved in a 529 plan held by a grandparent doesn't have to be declared when this fellow reaches 18 and has to fill out the Free Application for Federal Student Aid, FAFSA, used by virtually every college. The only exception is if the college requires a College Scholarship Service, or CSS, form -- and not all do. But even if the school he chooses does, our research told us that after his junior year, reporting this information is no longer a problem because it only affects future applications. Under those circumstances, Grandma could agree to pay for his senior year with no financial aid consequences.
  • Finally, my friend, who is a worry wart, was concerned that she might be very sick, blow through all her money and be required to spend up the 529 funds before she qualified for Medicaid. I thought all of this was an unlikely retirement scenario, given her frugality, but you never know. Fortunately, the state my friend lives in is one of the 15 or so states that has passed legislation that exempts 529 plans from consideration when applying for Medicaid, Social Security Disability or other poverty programs.
  • The state my friend lives in also gives 529 savers a break on state taxes, making up to $2,500 that she deposits each year in her grandson's account state tax-free -- a small, but still significant plus.

Now, we just need for the new guy to make his appearance.

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1 Comment
Mike Mann
February 19, 2012 at 8:07 pm

I don't think Social Security Disability is a poverty program. Love your articles. A daily reader.