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529 Plans: Saving for Your Grandchild’s Education Costs

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529 plans

Last week, while writing about Arizona’s new ABLE Act accounts, we realized we have not focused on Section 529 plans before. Let’s take care of that now.

What is a 529 plan?

Pardon us for starting off all wonky. “529” refers to Section 529 of the Internal Revenue Code. That tax law makes tax-advantaged education plans possible.

Each state sets up its own college education fund program, and nearly all the states participate. Most of the states operate an investment plan which can be used for college expenses when the time comes.

In the meantime money sitting in the 529 plan account grows tax-free. In fact, there is no income tax on distributions from the plan — provided that they are used for qualified education expenses.

What is a qualified education expense?

Section 529 says that money can be used for “tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution.” Also permitted: payments for room and board (in some cases and with some limitations), some special needs expenditures, and computer expenses. Thanks to changes adopted last year, the 529 plan can even pay for tuition at an elementary or secondary school.

Not everything a student needs will qualify, though. It’s possible that some tax might be due on distributions from the 529 plan when they don’t meet the “qualified education expense” limitation. Even then, though, the tax may be slight. Only the income earned inside the account is taxed, not the whole distribution. There is an additional 10% penalty, but in some cases that might not be much of a payment.

Who should set up a 529 plan?

Anyone who wants to save for college should consider a 529 plan. Do you have a new child? Consider a 529 plan account. Want to set aside money for a grandchild’s education? Set up a 529 plan account.

In our practice, we mostly see grandparents setting up 529 plan accounts. That makes sense. After your children grow up, start their lives and have a family, you are more likely to have available resources. The 529 plan is a great alternative to help out your children without interfering too strongly in their lives.

When you set up a 529 plan for your new grandchild, you can either put up to five years worth of maximum contributions into the account, or set up a small monthly deposit, or anything in between. If you choose to put $75,000 into a new account right now, there will be no gift tax consequence. If $100 per month is more manageable, that will be great, too.

Setting up an account for a grandchild has another side benefit. That gets us to the FAFSA.

How are 529 plans treated on the FAFSA?

Pretty much every applicant for a scholarship, loan or work/study arrangement has to fill out the “Free Application for Federal Student Aid” (FAFSA) form. The FAFSA exposes lots of long-time mistakes made — too often — by family members.

One choice to plan for future needs (education and otherwise) for your new grandchild would be to set up a Uniform Transfer to Minors Act (UTMA) account. UTMA accounts are wonderfully simple to set up and operate, but they get included in the FAFSA computation when it comes time to look for financial aid. Anything directly available to the student may get counted.

If you have set up a 529 plan, however, the result may be different. If you continue to own your education account — even though a grandchild is named as beneficiary — it will not affect the FAFSA calculations.

Putting the account in your child’s name (for the benefit of the grandchild) will make the 529 plan count on the FAFSA again. So most grandparents set up the account, make one-time or periodic contributions, and keep the account in their own name. It makes sense to name another grandparent (your spouse?) as successor custodian of the 529 plan account, too.

I’m sold. Which 529 plan account should I use?

We were afraid you’d ask that. Sadly, it’s hard to figure out which plan will work best for your situation.

Fortunately, there is a great online resource to help you compare plans. The Saving for College website is wonderful, and helps cut through the confusing choices. It even has checklists and questionnaires to help get you to the best solution.

Pay attention to the state-specific benefits. Depending on where you live, there may be a state income tax benefit to setting up a plan — but usually only if the account will be with your own state. There might even be some benefit to using the plan for the state where you know your grandchild will go to college.

Beyond that, you’re comparing investment options, ease of use and costs. You can quickly narrow the list to 3-5 state choices.

How should the account be invested?

You almost got us giving financial advice there. But we know better. You should talk to a financial planner to get suggestions.

Remember, though: you have decided to open up this account right after your grandchild’s birth, and so there will be 15-20 years before the education expenses will need to be paid. That should give a pretty long time horizon for investments to perform well. Plan accordingly.

The bottom line

We hope all that helps you better understand 529 plans. They are a pretty cool way to help save for a grandchild’s — or a child’s, or a good friend’s child’s — education costs.

Should you set one up? Let us put it this way: whenever a client tells us that they want their estate plan to include money for their grandchild’s education, we always give the same advice. We suggest a 529 plan as the most tax-efficient, disciplined and productive way to help educate a grandchild.


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Robert B. Fleming


Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

Robert has two adult children, two young grandchildren and a wife of over fifty years. He is devoted to all of them. He is also very fond of Rosalind Franklin (his office companion corgi), and his homebound cat Muninn. He just likes people, their pets and their stories.

Elizabeth N.R. Friman


Elizabeth Noble Rollings Friman is a principal and licensed fiduciary at Fleming & Curti, PLC. Elizabeth enjoys estate planning and helping families navigate trust and probate administrations. She is passionate about the fiduciary work that she performs as a trustee, personal representative, guardian, and conservator. Elizabeth works with CPAs, financial professionals, case managers, and medical providers to tailor solutions to complex family challenges. Elizabeth is often called upon to serve as a neutral party so that families can avoid protracted legal conflict. Elizabeth relies on the expertise of her team at Fleming & Curti, and as the Firm approaches its third decade, she is proud of the culture of care and consideration that the Firm embodies. Finding workable solutions to sensitive and complex family challenges is something that Elizabeth and the Fleming & Curti team do well.

Amy F. Matheson


Amy Farrell Matheson has worked as an attorney at Fleming & Curti since 2006. A member of the Southern Arizona Estate Planning Council, she is primarily responsible for estate planning and probate matters.

Amy graduated from Wellesley College with a double major in political science and English. She is an honors graduate of Suffolk University Law School and has been admitted to practice in Arizona, Massachusetts, New York, and the District of Columbia.

Prior to joining Fleming & Curti, Amy worked for American Public Television in Boston, and with the international trade group at White & Case, LLP, in Washington, D.C.

Amy’s husband, Tom, is an astronomer at NOIRLab and the Head of Time Domain Services, whose main project is ANTARES. Sadly, this does not involve actual time travel. Amy’s twin daughters are high school students; Finn, her Irish Red and White Setter, remains a puppy at heart.

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Matthew M. Mansour


Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.