Dear Liz: My son lives overseas. He just became a father. He plans to apply for U.S. citizenship for his dependent as an American born abroad. We would like to help save for our new granddaughter’s future. There are 529 accounts here.
Can he set up an account like that if he gets a Social Security number? Are there other options besides a 529 account for children born abroad?
Answer: If your son is a U.S. citizen and the child has a Social Security number or Individual Taxpayer Identification Number (ITIN), then he can open and contribute to a 529 plan benefiting the child.
So can you, and it may be even more beneficial for you to do so. Grandparent-owned 529 accounts, and distributions from those accounts, aren’t counted in federal financial aid calculations.
There are other options for saving for college, including regular savings or investment accounts, but 529s allow money to grow tax-deferred, and withdrawals are tax-free when used for qualifying educational expenses. That’s a significant advantage.
The money can be used at any school eligible to participate in a student aid program administered by the U.S. Department of Education, which includes the vast majority of U.S. colleges and many abroad. In addition, up to $10,000 annually can be used to pay tuition at elementary or secondary public, private or religious schools. Any unused money can be transferred to another family member. Plus, starting in 2024, up to $35,000 can be used to fund a Roth IRA.
In reading your response to the question about 529 accounts for overseas children, I think there is some important additional context that you left out, much of which is going to depend on where the family is living. As a parent of a young child in the UK (who is both an American and British citizen), I can only speak to the UK implications since I looked into this when my parents asked the same questions as the person who wrote into you. In your response, you noted that withdrawals are tax free when used for qualifying educational expenses. It should be made clear that this is only free of US taxes. Many other countries will not view a 529 plan in an advantageous way. Specifically, in the UK, these plans are treated as foreign trusts, which can have all sorts of tax implications including leading to income and/or capital gains taxes even if there are no withdrawals. However, even if this is avoided, the UK will still charge taxes on withdrawal if the child is a UK resident, which is likely going to be the case even if the child decides to go to college in the US. With tax rates often higher in the UK than in the US, there may be better alternatives for grandparents to invest for their grandchildren. But it is probably best to get tax advice from professionals who are versed in both countries’ tax laws t find the best option.