Help a grandchild but beware the potential drawbacks
Choose Your Plan Wisely
You can use any state's plan, but check your home-state 529 first to see if it's among the majority of state plans that offer a tax deduction for contributions.
It Will Be a Balancing Act
Using a grandparent's 529 for tuition can end up reducing a grandchild's need-based financial aid.
Not All Fees Are Created Equal
Some 529s have high fees, which ultimately means less money for college. The most recent figures from Morningstar show annual fees ranging from 0.08 to 2.38 percent.
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Double-Dip Dilemma
If a parent and grandparent each have 529s, failing to coordinate withdrawals can lead to a tax and penalty for one of them, says Joseph Hurley, founder of . They can't both claim their 529 dollars are paying the same education bills, or double-dip on the tax break. Plan with your financial adviser how to structure withdrawals annually. Or the grandparent can transfer his or her 529 to the parent.
Beware the Medicaid Menace
Medicaid pays nursing home bills for the poor. But a 529 can delay your eligibility for Medicaid assistance. That's because the 529 money is considered your asset, even if it's intended for a grandchild, notes the Centers for Medicare and Medicaid Services. You would have to "spend" that money for your care before Medicaid would kick in. If you do use the 529 money for anything other than college, it would trigger a tax on the investment gains plus a 10 percent penalty.
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