Dear Joe, My unusual question is this: My 30-year-old son has just graduated with his undergraduate degree (finally). My question is: Can I now start a 529 plan for his graduate degree? He is uncertain just when he will go. If he should not go, can I transfer the money for my grandson's education? -- Rosemary
Congratulations to your son (and to you) for successfully completing his undergraduate studies! If he is thinking about graduate school, and you wish to help pay for it, a 529 plan can be a great vehicle. Investment earnings will be tax-free to the extent your son incurs qualified higher education expenses, including tuition, fees, books, supplies and equipment, at an eligible educational institution. Room and board can also count, but only for those enrolled in a degree program and attending at least half-time.
Most graduate schools fit the definition of an eligible education institution, as do many vocational and proprietary schools, domestic and foreign. You can check for eligibility by accessing the U.S. Department of Education's look-up tool and determining if a particular school is listed as having a "school code."
If your son applies for federal financial aid, he will be eligible for independent status, and your 529 plan will not be reportable as an asset on the FAFSA application. However, any distributions taken during the year may have to be included in his base-year income when making an application for the following year. You may want to target use of the 529 plan for his final year of graduate school (if you are able to pin him down).
Any leftover funds in your 529 plan can be redirected to your grandson or other family member. You simply change the beneficiary on the account, or transfer a portion of the funds to another 529 plan with your grandson as beneficiary.
Just as there is a potential gift-tax consequence of your contributions to the original account, they also occur when the account beneficiary is changed to a new beneficiary one or more generations below the original beneficiary. But by first naming your child as beneficiary and then replacing him with your grandchild, you are not triggering the generation-skipping transfer tax that applies in many grandparent gifting situations. A gift is considered to occur between your son (the current beneficiary) and your grandson (the replacement beneficiary).