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529 for Niece/Nephew

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Inspired by the investing for niece and nephew thread, I thought I'd post my similar question here (didn't want to hijack the other thread). I'd like to start saving for my nephews for college, I'm assuming all will go (realize they may not of course) and that there are penalties if the funds were withdrawn for non-education purposes.  I am also unwilling to hand over money to put in one child's existing 529 as the parents joke about the account (funded by grandparents) being their "retirement fund", so I don't trust the money would be there for college. And if I holding it close to the vest for one I feel I should do the same for al three, as I would hate for my sister to tell my brother we're contributing to her sons account and have him get upset, even if I feel my reason is perfectly valid. If we do open 529s, would it make sense to open 1 or 3?  Guessing one could be in my husbands name, one in mine, and guessing the third may be an issue in that respect?  There are 3 children - 11, 9 and 2 - all different families, not siblings.  Our state allows a state tax deduction on up to 4K, so I am thinking with three acounts I would  deposit the 4K split 3 ways - maybe more for the older children and less for the youngest, since he has the most time before school.  I realize a 529 can impact financial aid and am sure these will not have enough for a full ride anywhere with costs increasing, so I am guessing these would be kept out of the kids names until their senior year, to avoid impacting financial aid?   I wouldn't tell my siblings about the accounts until the kids are in high school and would be open about the amounts and why I would want to transfer it later and get their buy-in, so a choice on schools, etc wasn't negatively impacted when the time comes.  One reason I wouldn't want to tell them now is so that no one is disappointed in a worst case scenario where I have to pull the funds to live. 

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The mechanics of how you set these up may depend somewhat on what state you are in.  In most states, you can set up the accounts with you as the owner and the child as the beneficiary, and you would be able to take the state tax deduction.  You wouldn't need to tell the children (or the parents) about the accounts, but you may need the children's social security numbers to set up the accounts.  You can also change the beneficiaries on the accounts, but there are restrictions in some states; the beneficiary may have to be a sibling or meet other requirements.  Cousins may not qualify, so you might be best off setting up individual accounts with each child as beneficiary on each individual account.  I would suggest reading the entire set of plan documents for your state.  Also, a few states permit a tax deduction to be taken for a contribution to ANY state's 529 plan.  If you're in one of those states, you might have a little more homework to do.
 

rated:
PennSmoke said:   Inspired by the investing for niece and nephew thread, I thought I'd post my similar question here (didn't want to hijack the other thread). I'd like to start saving for my nephews for college, I'm assuming all will go (realize they may not of course) and that there are penalties if the funds were withdrawn for non-education purposes.  I am also unwilling to hand over money to put in one child's existing 529 as the parents joke about the account (funded by grandparents) being their "retirement fund", so I don't trust the money would be there for college. And if I holding it close to the vest for one I feel I should do the same for al three, as I would hate for my sister to tell my brother we're contributing to her sons account and have him get upset, even if I feel my reason is perfectly valid. If we do open 529s, would it make sense to open 1 or 3?  Guessing one could be in my husbands name, one in mine, and guessing the third may be an issue in that respect?  There are 3 children - 11, 9 and 2 - all different families, not siblings.  Our state allows a state tax deduction on up to 4K, so I am thinking with three acounts I would  deposit the 4K split 3 ways - maybe more for the older children and less for the youngest, since he has the most time before school.  I realize a 529 can impact financial aid and am sure these will not have enough for a full ride anywhere with costs increasing, so I am guessing these would be kept out of the kids names until their senior year, to avoid impacting financial aid?   I wouldn't tell my siblings about the accounts until the kids are in high school and would be open about the amounts and why I would want to transfer it later and get their buy-in, so a choice on schools, etc wasn't negatively impacted when the time comes.  One reason I wouldn't want to tell them now is so that no one is disappointed in a worst case scenario where I have to pull the funds to live. 
There are many questions in there.

Ownership. For tax reasons, for FAFSA eligibility, and for flexibility, you want to retain control of the money. No question that you need to be the account owner.

Not telling the parents. I'd highly recommend it for multiple reasons. First, you may change your plans. If the kids end up being jerks, or parents'  situation changes, family reason (someone's kid needing the money more than others), etc, or you needing the money for yourself, you want to be able to dispose of that money any way you want at the time of the kids entering college. Secondly, it won't give the kids nor their parents a sense that they are entitled to that money which in turn may make them slack off on saving for their kids' college funds. And if by any chance, you changed your plans, nobody will resent you for it or be disappointed.  Or if you really need to tell them (such as to get their SSN), at the very least, be ultra vague and lowball the amounts involved to manage expectations.

For taxes, make sure you read on the state tax deduction. Some are per beneficiary, some are per account holder, some are per joint returns. Details matter so no way around reading carefully to maximize tax deductions.

For FAFSA considerations, just make sure that in the rules of the specific 529 plan you're considering, that you can change beneficiaries at least once per year. And make sure the relationship with the nephews is fine for them to be beneficiaries. I "think" most states allow nephews but better be safe than sorry. So double check the plan details. Then if you don't want to tip the parents off about the 529 plans by asking about the kid's SSN (which you need along with DOB and address) just name yourself, your spouse, your father/mother, etc as beneficiary initially. There's no age limit for beneficiaries (unlike ESA accounts).

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