02 Sep What’s the best way to save for my grandchildren?

Q. When I was a kid, I had a passbook savings account that relatives would contribute to for birthdays and holidays. My dad bought savings bonds for my kids. Now I have grandchildren that I’d like to help out, but neither of these options seems very good. Should I set up a brokerage account or 529 account for them? Should I set up one per family or per grandchild?
— Grams

A. 529 plans are a great way to gift money for your grandchildren’s futures.

Here’s what you should know.

529 plans provide tax advantages that can help mitigate rising college costs, said Stephen Craffen, a certified financial planner with Atlas Fiduciary Financial in Oakland.

He said you should open a separate account for each child because when it’s time to take withdrawals, “you can only make tax-free withdrawals for qualified education costs of the named beneficiary.”

“It can get complicated if the funds are intended for other children,” he said.

Craffen said you should choose a plan with low fees and you’re not limited to New Jersey’s plan, which has had some recent changes.

“In the past, the New Jersey plan has been considered a sub-standard plan due to high fees, limited options and little incentives,” Craffen said. “However, the state has been working on this and as of this past June, NJBEST will provide a one-time scholarship up to $3,000 for beneficiaries of the plan who go to college in New Jersey which makes it more attractive.”

To be eligible for the full $3,000 scholarship, students must have an NJBEST account that has been open for at least 12 years and has at least $3,600 in contributions invested, Craffen said.

“While grandparents can open a 529 plan with any plan in the nation, this increased incentive is hard to ignore,” he said.

But before you open the accounts, know that the funds you save in a 529 plan can affect eligibility for student aid.

When entering college your grandchild will file the Free Application for Federal Student Aid (FAFSA) form yearly to determine eligibility for federal financial aid.

“A 529 account owned by a grandparent is not reported on the form but when funds are distributed, the funds are considered student-owned (income) which reduces the following year’s financial aid award by 20%,” Craffens said. “One way to get around this is for the student to use the grandparent’s savings in their final college year.”

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This story was originally published on Sept. 2, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.