<p>So my dad has a 529 in his name and even though I explained to him that the laws changed and it would affect our son's financial aid, he refuses to change ownership to my son so it could be counted as a parental asset at 5.6% of the value. My son heads to college Fall of 2013.</p>
<p>Help me understand how it will work, please? The 529 is $60K and we had planned to take $15K each year for the UCs (in California.) The financial calculator shows he would receive $14000 grant aid. I understand that the first year would not be impacted because the $60K wouldn't show as an asset but the first disbursement would show as untaxed income for my son. </p>
<p>**Is the $14K grant reduced "dollar for dollar" or is it 20% of the 15K (~$3000) for the next years finaid? If it's the 20%, he could do the student load max per year of 3500 to fill in the gap? </p>
<p>Again, the grandparent is absolutely unwilling to change ownership so are there any other work arounds? We have virtually no other assets so doubt we could even get a loan instead of taking the $60K.</p>
<p>You’re confusing student contribution from assets with student contribution from income on the FAFSA form. See worksheet A here: <a href=“http://ifap.ed.gov/efcformulaguide/attachments/082511EFCFormulaGuide1213.pdf[/url]”>http://ifap.ed.gov/efcformulaguide/attachments/082511EFCFormulaGuide1213.pdf</a></p>
<p>Having a 529 in a grandparent’s name is the best way to hold that kind of asset for FAFSA-only schools. You will not need to report it as an asset at all. You do need to report the income as untaxed income during the year it is withdrawn. The student has a $6000 income protection allowance, so only $9000 of the $15K annual income will be “taxed” by FAFSA. It will increase your student’s EFC by 50% of the amount, so if your EFC is currently $10,000 then next year’s EFC will be $14,5000. </p>
<p>You can do the math for all 4 years, but my guess is that it will be a wash. Either your first year EFC would be increased by $3360 if the money was in the student’s name ($60,000 x 5.6%) or it will be increased by zero if it remains in the grandparent’s name. The second year EFC would be increased by $2520 ($45,000 x 5.6%) if the money is in the student’s name, vs an increase of $4500 if declared as untaxed income. So in the first 2 years you actually come out better by having the money in the grandparent’s name.</p>
<p>Thank you vballmom. Can you help me in concrete terms? (I ran these in Jan so they have changed a bit but close enough for what I am trying to figure out, I guess.)</p>
<p>For example, using the finaid calculator for UCLA, it says EFC is $8437 and the student self help is $9200 so our estimated net cost would be $17637 after the grant of $14009.
So the first year, he takes a distribution of $15,000 so the following years grant will be reduced by what dollar amount? I didn’t know about the $6000. </p>
<p>What would it be the 3rd year and the 4th year? </p>
<p>Would you stick to taking the $15K each year or take all that he needs to cover the first year? and the second and then come up short at the end because it’s possible that the funds would grow or ? I read something about taking out $4K less than we need to utilize some education tax credit. Do you know what that is and would it apply to us or the grandfather?</p>
<p>Thanks again and I have some hope now after just crying for about an hour thinking son couldn’t go to college in our home state! </p>
<p>How is it different for the CSS Profile schools he wants to apply to? The grandparents are also holding a 529 for my daughter and I did see a question about that on the Profile. She is only 12 so it will be a long time before she takes any distributions.</p>
<p>Another quick question if you don’t mind? DH works for a local community college and since California is in such bad shape, they just cut his salary by 10% for 10 months and 25% for 2 months in the summer. It just started this month so next year’s financial aid will be based on this years income and for the first 5 months of this year, he made more than he will next year. How will finaid take this into account if the aid is based on this year’s income that won’t be the same as next years? Gosh, it’s all so complicated!</p>
<p>I wonder if it would be possible, when it comes time to pay the bills, to roll the amount into a student or parent owned 529 account then pay from that account. Would your Dad be amenable to that if it is possible?</p>
<p>(not sure if it would work, just thinking aloud)</p>
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<p>The only thing you can count on calculating is the EFC; I don’t know that the grant will be guaranteed every year given California’s budget woes. Fees will go up every year but the good news is that room and board could possibly go way down if your student lives off campus.</p>
<p>So this year’s EFC is $8437. Next year’s EFC, all other things being equal, would be increased by $4500 to $12,937. The $4500 comes from 50% of the additional untaxed income the student is receiving, net of the student income protection allowance (($15000 - $6000) x 50%). With your husband’s reduction in salary, your EFC would most likely be less than that. Your income counts at a marginal rate of 47% if the AAI (adjusted available income) is over $30,000. So if your husband’s income is reduced by $10,000, then your EFC would be reduced by $4700 if you’re at the top marginal “tax” rate for FAFSA (see Table A6 in the link from my first post). That puts your EFC back down to $8227 for year 2.</p>
<p>For year 3, if you again take out $15,000, you’ll again add around $4500 to your baseline EFC. The student income protection allowance increases a little bit every year, so the actual increase in EFC will be a little less than $4500. </p>
<p>For CSS Profile schools, you must report all college funds that are held for the benefit of the student, so grandparent-owned 529s are reportable.</p>
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<p>I’d delay taking out the funds until year 2 or 3 if possible, but only if that won’t cause your family a great hardship.</p>
<p>As far as taxes go, the maximum amount of the tuition and fees deduction you can claim is $4,000 per year. There’s a phase-out at certain levels of AGI. The deduction is for parents who claim their child/student on their taxes; the grandparent can’t claim it.</p>
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<p>TOTALLY agree with this. Grandma had a 529 in her own name but designated for daughter. We waited until semester 2 of junior year to use it, AFTER we filed the FAFSA that year. This way we didn’t have the 529 affect daughter’s aid for senior year. It was hard, but we made it work. Senior year was a breeze because she got her usual financial aid and we used the 529 for both semester 2 junior year and for all of senior year. If you can do this, it’s sooooo worth it.</p>
<p>Thanks so much for all of your help, vballmom! I checked and there is no fee or penalty for them to change the title to my son but they won’t do it so…at least now I know how it will impact his finaid. Better to find out now than next year when the money is due! M</p>
<p>I am going to go back and do the worksheets and the estimators and see how it all plays out. I don’t even really know what our AAI is since I only plugged last years tax return numbers into the financial calculators for each school. </p>
<p>Do you think we would benefit by seeing some type of advisor? What type of person would you recommend? Dh’s check is so confusing to me because he doesn’t even pay Social Security because Ca has it’s “own” retirement account so I don’t know how to plug that into the blanks on the form.</p>
<p>Thanks so much for explaining it all to me! I really appreciate the time you took to do the calculations and write all of that out.</p>
<p>swimcatmom, I don’t know if that would work but it sure sounds like a good idea. However, the grandparents are not open to any such things and in the back of my mind, I have to wonder if they are even planning on giving it to my son at this rate because why else would they object to changing it to his name after finding out there are no fees or penalties to do so?! We do have a small 529 for him ourselves already set up so that would be a simple way to transfer the funds without such penalties and if it was put in a short time before taking it out, (deposit in Aug, take it out in Sept) it wouldn’t even show as a parental asset. I wonder if that would be legal? Oh well, off to discover how to come up with $15K a year if they decide not to give the money to ds…</p>
<p>I like swimcatsmom idea. When it comes time each year for a withdrawal from the account to pay qualified education expenses, just have that withdrawal go first into the custodial parent’s 529 account with son as beneficiary. THEN pay the expenses out of that account. Voila - no untaxed income to report on FAFSA.</p>
<p>kelsmom - does this work?</p>
<p>Yes, franglish, I have read that is really the only way to do it so it doesn’t impact the finaid award. However, I don’t know how we would pay the $17K in year one, two and 1/2 of that in the second half of year 3. You are absolutely right though for others in our situation that can manage those first 3 years of payments, that is the only way to have it not change the finaid award.</p>
<p>I’d be curious to know if swimcatmom’s idea is legal too? They might be willing to do that especially since my son’s account is already open, maybe? What difference would it make to them, really? Unless it’s not legal!</p>
<p>It’s always legal to withdraw from a 529, even for non-qualified expenses (you’d pay a 10% penalty plus tax on the gains). It’s also legal to roll over from one 529 to another, or re-title a 529 from one custodian to another (check your state laws on this one). You just need to be careful that the withdrawal from the grandparent 529 is rolled over, not withdrawn and then redeposited. If it’s just withdrawn and doesn’t go directly to qualified higher education expenses, then the funds are subject to the penalty + tax. It’s safer to do a direct plan-to-plan transfer.</p>
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<p>It appears to be a gray area. Some states apprently allow it, others don’t and this appears to be on the IRS 529 loophole list.</p>
<p><a href=“http://www.bogleheads.org/wiki/529_Plan_Account_Transfers[/url]”>http://www.bogleheads.org/wiki/529_Plan_Account_Transfers</a> </p>
<p>The link above discusses the issue and it looks like it may be possible in some states but not in others. Details are in that page. If it is possible in the state of the OP, then it could be an alternative, but one needs to do the math on the lines suggested by vballmom.</p>
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<p>As stated above some states are very restrictive</p>
<p>Thanks for posting that link, maze. This statement was eye-opening:</p>
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<p>That seems pretty harsh, doesn’t it? I’m assuming that doesn’t apply to inherited 529s where the successor owner takes over.</p>
<p>OP appears to be from California, and the change in account ownership is going to be costly. It might actually be better to have in Grandpa’s name then the parents name, and hence a blessing in disguise that the he does not want to change names (assuming grandpa lives in California too).</p>
<p>Yes, definitely a “gotcha” for California residents who want to consider changing 529 ownership. I still think a transfer from one 529 to another would be possible with no penalties, but the OP should tread carefully.</p>
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<p>It’s difficult to find good advisors who know the ins and outs of college funding. Most CPAs and financial planners don’t know this area in the way that some of the financial aid professionals (and worried parents) do here on this forum. Keep asking questions here and sooner or later you’ll get advice that’s helpful to you :)</p>
<p>Thanks again for all of your helpful replies! No, grandfather doesn’t live in CA but we do. </p>
<p>I am looking at some other options but am wondering now, if they are not going to give the kids the money, do I still have to declare it on the CSS Profile? What if we never take a distribution? Would it ever show up somehow? If there is going to be difficulty in getting the money, I don’t want to have to declare it and have schools base our Finaid on a “maybe” someday they might get it. We would be going from having no assets, to all of the sudden, having to declare over $100K between the two kids.</p>
<p>After the discussions yesterday, I just don’t understand the unwillingness to make some other arrangement unless the plan is to not give it to the kids. We went through the list of options, even offering to pay the 10% penalty to move the money and have them write the check directly to the college but they were not open to any solution so it just seems like a no win situation and a disingenuous offer to help.</p>
<p>Could the grandparents be thinking the kid may go off the deep end - not go to school and then suddenly it is his money? Obviously I have no idea about your kid but this just popped into my brain.</p>
<p>If your EFC is already $8k plus, I don’t think you will see much need based aid from UCLA, at least not any Pell & related aid. Perhaps Cal grants or Blue & Gold, how would those be affected by 529 info on the next FAFSA?</p>
<p>I would be the unwillingness to give up control is just that, many in the older generation , say born in the 1910s-1920s-1930s, who lived through the depression or WWII see our generation, the boomers, as indulged and indulgent. Many old men who are clients of our office want to control anything they can, it’s as if somehow they think their sons and daughters are going to blow it all on a trip to Vegas or something?! And yet not something they articulate, not something that is a reality based fear about their kid, just what they and their cronies feel is the right way to do things. I would try not to take it personally. </p>
<p>If you do get an aid package at entry which would be affected by 529 monies, delay the 529 payout until spring of junior year.</p>
<p>Or, could the grandparents not trust either of the parents to properly administer the college funds? My parents are assisting with college tuition $$ but would never in a million years trust my husband with the money. They are making payments directly to the schools.</p>
<p>Thank you all for your replies once again.</p>
<p>**If I am fairly certain that the 529 will be withdrawn, do I have to report them on the CSS Profile? </p>
<p>This just doesn’t seem right in that the very nature of a grandparent owned 529 is always subject to them taking it back or doing whatever they want with it. That WILL hurt us because we will now have assets over $100K because they also ask for the sibling’s 529 to be reported. We would not qualify for Pell but the CalGrants would be pretty substantial at ~$14K toward a UC (unless Brown makes more cuts!) Our income is now under $60 with the recent cuts so ds would likely qualify for some aid from private colleges as well if I understand how things work so far.</p>
<p>My son is a top student, rank #2, 4.67 weighted, 33 ACT, so he is not going to abuse the funds. The 529 funds are in the step-grandmother’s name so as soon as the grandfather dies (in the next year or so), she will take them back no matter what the penalty. The conversation yesterday and the unwillingness to change the ownership just solidified my suspicions. The option to close the 529, pay the 10% penalty and have them write the checks directly to school themselves would still give them all the control but they wouldn’t do that either. </p>
<p>I spent a great deal of time researching yesterday and found out that you can not use the funds to pay back loans. You must use the funds for expenses in the same calendar year that they are incurred. If we waited until Spring of junior year to make a withdraw, there would be more than $25,000 left over, unused.</p>
<p>All of the above is moot though because I’m fairly certain the funds will be taken back so my pressing question is do I “really” have to report these 2 funds if we never plan on making a withdraw? How would the schools ever know?</p>
<p>As much as ds wanted to stay in CA for school, I am heading over to the scholarship thread to see if there is anywhere he could get a full ride with his stats! If not, he might just have to do the CC route to transfer later.</p>