Two sets of grandparents have set-up 529 college plans for my two young children. Should my husband and I set-up a third 529 plan for each of them (we're not interested in setting-up another type of fund), or should we simply make monthly deposits into one of the already established accounts? Pros/cons of both options?
Thank you very much for reaching out with this wonderful question and considering how important this topic is, it is a question that I am sure many people have. Let me first congratulate you on saving for your kids' college. A college education is very important and as long as you are not sacrificing your own retirement, it is a wonderful goal for many families.
The key to understanding this situation is to look at the impact on federal financial aid. Parent owned asset typically will not have as negative of an impact on financial aid as an asset owned by the student. If the asset is owned by someone other than parent or student, the assets are not included in consideration for federal financial aid. If the grandparent provides any type of financial support to the student (distribution from a 529 qualifies as financial support), the support is reportable on the FAFSA application as student income and can affect the student's federal financial aid.
However, having a mix of parent and non parent owned assets is not a bad thing either as long as each plan is managed to the same goal. Another thing to keep in mind is that if you put money into the grandparent owned accounts, the grandparents own that money and can change the beneficiary as they see fit. There is no guarantee that it will go to your children. However, if you own the 529, you can ensure the beneficiary you desire (your children) receive the funds. If you children both get scholarships, you can name another qualifying family member as beneficiary, including yourself if you desire to continue you education. Also, in the case of scholarships, you can withdraw the amount of the scholarship from the 529 penalty free but you will pay taxes on the earning. This option is not available to you if the grandparent owns the 529.
In recap, here are the highlights.
1) Understand how federal financial aid works. I recommend reading my blog discussing how FAFSA works. It can be found here: https://communities.usaa.com/t5/Financial-Advice-Q-A/How-does-FAFSA-work/qaq-p/94301
2) Have a plan and ensure both grandparent and parent 529 plans are working towards the same goal.
3) Having control by owning the 529 yourself gives you more options to ensure your desire for the money actually happens.
I welcome any comments or additional questions you might have.