<p>My daughter is graduating high school in June 2008, and I am starting to educate myself of the financial aid process. I recently attended a seminar in which the instructor completely discredited the value of a 529 plan. </p>
<p>As I have been diligently contributing two 529 plans, one of the comments that was particularly concerning is that distributions from a 529 plan are reported to the beneficiary, in this case my student daughter, on a 1099Q, and although not income for tax purposes, is included in the student's income for most private college aid calculations. The result being that the EFC is increased by 50% of the distribution.</p>
<p>Is anyone famaliar with this 529 plan "penalty"!!</p>
<p>Treatment of 529 savings plans changed this year. As I recall, they're now considered a parental asset (and assessed at the much lower parental rate). Not sure about dividends, but even if they show as student income, students get an income protection allowance up to $3K or so, so for most it won't increase the EFC at all.</p>
<p>These "seminars" are usually trying to sell you on another approach.</p>
<p>Not sure where you live, but every dollar I contribute to a 529 can be deducted (up to $20K per year) on my income for state taxes... and the benefits are tax-free as well.</p>
<p>There are 2 things to consider about 529 Savings Plans; ownership and distributions. A 529 owned by the student, a grandparent who doesn't live in the family household, a small business (less than 100 FT employees) that the family owns and contros is EXCLUDED as an asset in the calculations. Naturally,the risk of having a student own one can obviously outweigh any rewards!</p>
<p>Distributions, and here's what no one ever talks about, that exceed the EFC, will REDUCE the college's financial aid portion dollar for dollar! Example:
COA - 45,000; EFC - 10,000; FN - 35,000. If the 529 balance is $50,000, and there is a "qualified" distribution of $12,500, the college will reduce its portion by $2,500/yr! Distributions in excess of the EFC benefit the college -dollar for dollar! </p>
<p>529's are the best thing since sliced bread for the RICH, or families who will qualify for little or no need-based financial aid. Families with low or modest EFC's must try NOT to have their 529 balances exceed 4 x their EFC, or they could have devastating financial consequences! Don't withdraw more than the EFC in any given year. If there's money left over after graduation, the taxes and penalties will surely be less than a loss of 100 cents on the dollar.</p>
<p>Maybe not:
[quote]
Distributions from 529 savings plans that are not subject to federal income tax (that is, all plans as of January 1, 2004) are not counted as either parent or student income for purposes of financial aid calculations. Further, they do not reduce the assumed cost of attendance, unless in particular instances a school becomes aware of a 529 savings plan distribution and decides to invoke the "professional judgment rules."
<p>I guess it seems like some people want it both ways. They want the benefit of having all of the money not be an asset or to be considered for finacial aid calculations even though it is for college and then they want not to be penalized if they take an amount out that is bigger than what is needed as EFC. In other words it sounds like the arrgument is I can afford college but because I put all the money in a 529 it means I can't? A 529 is not a tax sheltered retirement account or should I say not meant to be. That colleges may not consider it in the asset calculation and often do not deal with distributions seems pretty fair to me.</p>
<p>The only disappointment I have re: 529's and financial aid is that the entire amount saved for ALL children is counted as an investment in determining each child's available assets (in parent's names). I have 4 kids and have saved for each, but now that #1 is off to college, on my FAFSA for this year, I had to report the savings for all 4, which was used to calculate my efc. Seems a bit unfair as the money saved for the other 3 is not available to use for #1.</p>
<p>actually, what I meant to convey is that on the FAFSA they treat all of your 529 savings as though they are available for child #1, regardless of how I have distributed them (having 4 kids and trying to treat each equally, I have saved for each on a percentage basis based on age in 4 accounts) - but on my FAFSA, I have to declare the existence of all 4 accounts as if they are available for child #1 when in my mind they are not available for him - they are for his siblings.</p>
<p>Keep in mind that you have a parental asset protection allowance in the FAFSA formula, typically about 50K for a two parent family (actual amount depends on age of older parent). Assets below that amount don't get assessed in the formula, and assets above that get assessed at 5.5%.</p>
<p>So, for a hypothetical family with 20K in non-retirement savings, and (4) student 529 savings accounts (which are considered a parental asset) of 10K each, only about 10K of the total 60K in assets will get assessed, and only at 5.5%, so it will contribute only about $550 to the EFC.</p>
<p>So it may not be as bad as it appears at first.</p>
<p>It all comes out in the wash. If you were to use everything for the first child than you would qualify for more aid for the second etc. Although there are adjustments for asset and income protection based on family size etc., really the snap shot is for what could be used for a particular child. As was pointed out only about 5.5% of assets above allowance are used.</p>
<p>My husband doesn't have a pension or retirement plan at work, but does have a 401K (to which the company contributes pittances once in a while) for that purpose. Do I have to report it's value as an asset on FAFSA?</p>