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Tap Grandma and Grandpa for help with college bills

Funding 529 plans are a team effort

Grandma pouring money
Paul Bradbury | Getty Images

It's time to pass the hat on college savings.

While 39 percent of high-net-worth grandparents are chipping in for college, more of them could assist, Fidelity Investments found, based on an online poll of 1,273 parents who were at least 55 years of age.

Grandma and Grandpa don't necessarily want to be stingy. In fact, three-quarters of those polled in February and March this year said they were willing to help fund their grandchildren's education.

Rather, adult children aren't bringing the conversation up with grandparents, said Chris McDermott, senior vice president at Fidelity.

"Grandparents aren't talking to their kids about their feelings and desire to help," he said. "[Adult] children aren't talking to their parents about the anxiety, stress and the financial needs they may have in order to get support for future college expenses."

Parents are saving

Though assets have poured into 529 plans in the last decade — there was $253.2 billion in these plans as of 2015, compared with $82.5 billion in 2005, according to the College Savings Plans Network — the accounts themselves tend to be fairly modest. Last year, the average account had $20,190 in it, the network found.

The good news is that more parents are saving for college. A separate online Fidelity study of 2,196 parents in May and June showed that 72 percent were squirreling away cash for higher education, up from 58 percent in 2007. They used a number of college savings accounts, including 529s.

Earnings accumulate tax-free in a 529, and withdrawals aren't subject to taxes as long as the money is used for the beneficiary's qualified educational expenses.

The bad news is that the median amount parents had saved for college in 2015 was $3,000, according to Fidelity.

Mom and Dad could probably use some help from their own parents. They just need to talk about it.

Plans for paying

Life is getting in the way of these conversations between grandparents and their children. Even though a discussion about paying for college isn't as emotionally fraught as a talk about end-of-life-planning, it can still be a difficult and stressful chat, McDermott said.

Concerns around gift and estate planning can make the conversation even more confusing. "It gets complex fast," said McDermott.

If you're feeling generous, and you'd like to contribute to your grandchild's 529 plan, here are a few things to keep in mind. As always, consult a tax planner or financial advisor for your particular situation:

  • Be mindful of the annual gift limit: The Internal Revenue Service allows you to make an annual gift of up to $14,000 per child — and do so without having to pay gift taxes. This amount includes all of the money you've given to the child, however, not just the 529 contribution for that year.
  • You may be able to front load a 529: If you'd like to put more money to work, you can make a lump-sum contribution of up to $70,000 — or $140,000 if you're married and filing jointly — if you elect to spread that gift out over five years.
  • Consider the gift's effect on your estate: Your estate may benefit from your generosity, as a contribution to the 529 counts as a gift, and it moves those assets out of your taxable estate. Make a gift now, and save on estate taxes later.

Grandparents who contribute to a 529 plan are also making a gift to their own adult children: Their kids get some breathing room to focus on the present cost of raising a family.

"The cash flow tends to be a little more fluid with grandparents, compared to young parents who are trying to build careers and buy homes," said Valerie Chaille, a certified financial planner with Circle City Wealth Advisors in Indianapolis.

Parents setting up a 529 plan for their children ought to let family members know that the account is there, and that it's an alternative to buying presents on birthdays and holidays, said Chaille.