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JULY 1, 2019

Can I open an education savings account for a grandchild?

Answered by
Richard Polimeni
Director, Education Savings Programs, Bank of America
Yes, you most certainly can open a 529 account as a grandparent — you can generally name anyone as a beneficiary of a 529 account.
These accounts can be a useful financial tool for both grandparents and their grandchildren. In addition to using 529 assets for college expenses, you may use up to $10,000 per year per beneficiary from all 529 accounts to pay for the beneficiary's tuition in connection with enrollment or attendance at an elementary or secondary, private, public or religious school.

Are contributions to a grandchild's 529 account tax-deductible?

While 529 contributions are not tax-deductible on the federal level, many states allow residents to take a state income tax deduction for contributions to an in-state 529 account. Additionally, contributing to a 529 plan can be useful as part of your estate planning. Federal tax law permits you to contribute up to $15,000 (for 2019, or $30,000 for a married couple electing to split gifts) to a beneficiary's 529 account each year, free from federal gift taxes. And if you'd like, you can make a lump-sum contribution of five years' worth of contributions, or $75,000 ($150,000 for a married couple electing to split gifts), in one year. This gives your contribution more time to grow as an investment. But you will have to wait five years to make another contribution, to avoid paying taxes on your gift or having it count against your lifetime unified credit.
Graphic depicting two ways to contribute to a 529 over a five-year period, within contribution limits.
Source: Merrill Edge based on Instructions for Form 709, Internal Revenue Service, pages 6 - 7

What are some of the other benefits of opening a 529 for my grandchild?

You can now use up to $10,000 per calendar year per beneficiary in 529 plan assets to help pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school.
Consider the following 529 advantages:
  • They have tax-free growth potential.
  • Qualified withdrawals (think: tuition, room, board, books, etc) are free of federal — and, in most cases, state and local taxes.
  • Unused funds are transferable to a relative of the beneficiary, tax-free.
As noted above, a 529 account can allow investment earnings to grow, exempt from federal (and possibly state and/or local) income taxes, and withdrawals that are used to pay for qualified higher education expenses — such as tuition, fees, room, board or books — are tax-free. Opening a 529 account for your grandchild will have a limited impact, if any, on whether he or she can receive federal financial aid or other government grants or scholarships.

Could the 529 plan I choose limit my grandchild's college choices?

You can participate in plans sponsored by other states as well as those in your own. It doesn't matter where you or your grandchild live — or even in which state your grandchild plans to attend school. Keep in mind that some states offer their residents a state tax deduction on contributions to a 529 account (in many cases the deduction only applies if you contribute to a 529 account in your home state). When choosing a 529 plan, you'll want to compare fees, investment options and lifetime contribution limits, which may differ from state to state.
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Footnote 
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Footnote 
Before your client invests in a Section 529 plan, they should be provided the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which they should consider carefully before investing. They also should consider whether their home state or their beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.
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