Earlier this month, we wrote about using required minimum distributions (RMDs) to make charitable gifts. But in what other ways can you use your RMDs? One option: fund a 529 account for a child or grandchild.
A 529 account (or 529 plan) is a tax-advantaged savings plan designed to encourage saving for future college costs. The different types and mechanics of 529 plans are best saved for another blog post. For now, the important thing to know is that there are three main benefits to using your RMDs to fund a 529 plan:
1. Earnings grow tax-free.
Usually, you have to pay income taxes on RMDs. If you then invest the RMD, you will likely pay a second round of taxes on those earnings down the road. On the other hand, if you contribute your RMD to a grandchild's 529 account, you will still pay income tax on the RMD, but the money you invest in the 529 account will grow tax-deferred. And if the money is later used for qualified education expenses, the entire amount is available tax-free.
(Three 529 Withdrawal Penalties to Avoid)
Additionally, the amount you contribute to a 529 account is not included in your estate for estate tax purposes — even though you retain control over the funds.
2. Helps financial aid qualification.
Federal financial aid (FAFSA) calculations consider the total resources of a prospective student when determining need. The Expected Family Contribution (EFC) to a child's college education takes into account 20% of a student's assets, but just 5.64% of a parent's assets and 0% of a grandparent's assets.
(How Assets Hurt College Aid Eligibility on FAFSA)
Giving your RMD to a grandchild as a check or other type of gift will likely increase the amount he or she is expected to pay for college. But by setting up a 529 account in your own name with a grandchild as a beneficiary, you keep your contributions classified as your assets and help your grandchild qualify for federal aid.
3. Offers flexibility.
529 accounts offer flexibility in the event circumstances change after you open the account. Say, for instance, one of your grandchildren gets a full scholarship to college. You can change the beneficiary of the account to another family member and still retain the tax-advantaged status of the plan. And if you decide to go back to school during retirement, you can even name yourself as the beneficiary of your 529 account.
Put RMDs to work for loved ones.
If you are fortunate enough to not need all of your RMDs, consider funding a 529 account to help your children or grandchildren on the way to a brighter future.
For more information on 529 accounts and their role in your estate plan, talk to a qualified financial advisor and contact the experienced Oklahoma City estate planning attorneys at Postic & Bates today for a free, no-obligation consultation appointment.
David M. Postic is an attorney at Postic & Bates, P.C. His practice focuses on estate planning, probate, real estate, trust administration, business planning, and adoption.
You can email David through our Contact Us page or by calling our office at (405) 691-5080.
[As with all our blog posts and other publications and resources, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]