529 Plan owned by non-custodial parent (or grandparent) with child as beneficiary

Paying for College
1

<p>Just want to confirm that this is the correct way to report it.
By the way everything here probably applies to grandparents, except for non-custodial profile.</p>

<p>FAFSA Asset:
----Not reported on FASFA, since FAFSA only requests custodial parent and student assets.</p>

<p>CSS Profile Asset:
----Not reported on CSS Profile, since CSS Profile only requests custodial parent and student assets.</p>

<p>Non Custodial CSS Profile Asset:
----Included in section H3a of the Non Custodial Profile.</p>

<h2>----Noncustodial Parent and Current Spouse's Assets - Investments - What is the total current market value?</h2>

<p>When making withdrawals:
FAFSA Income:
----ncluded in section 45j - Money Received or Paid on Student’s Behalf:</p>

<p>CSS Profile Income:
----Included in section SI-160G - STUDENT'S INCOME AND BENEFITS (SI)
----Enter the amount of any other untaxed income you received or expect to receive</p>

<p>Non Custodial CSS Profile Income:
----Included in section C6 a. - Noncustodial Parent's Support of Former Household</p>

<h2>----Amount you paid or will pay for the student's education, excluding child support</h2>

<p>The part above is my main question. Below I have somewhat less important questions/comments:</p>

<p>1 - It probably would have been beneficial if I had transferred the 529 plan to my ex-wife. Since parental assets are looked at less strongly than student income. But I would have to trust the ex enough to do that. I prefer keeping control, and lose some benefit. Although the first $6000 of student income does not reduce benefit.</p>

<p>2 - What is the best way to make the payments from the 529 plan? Directly to the school? To the kid and he pays the school? To my self and I pay the school?</p>

<p>3 - Does other cash help to student also have to be reported on Fafsa 45j/CSS SI-160G ? I assume yes.</p>

<p>4 - Does non cash help to student have to be reported on Fafsa 45j/CSS SI-160G ? Examples Clothing, Presents, Refrigerators, etc... How many people actually report all this thoroughly? Does every kid that files FAFSA report every present he/she gets from anyone? Where do you draw the line?</p>

<p>5 - Are these the qualified expenses from 529 plan:
Tuition & Fees
On-campus Room & Board
Books
Computer+Accessories (I cannot be sure of this one).
What else?</p>

<p>I think that is it, hope the answers help me and others.</p>

2

<p>2 - Probably not to yourself and then you pay the school, as this has been reported to generate inquiries by the IRS since you will not be the recipient of the 1098-T. If paid directly to the school and the student receives financial aid, the school may mistake the 529 funds as an outside scholarship and reduce institutional aid accordingly. Safest strategy is to have the 529 withdrawals payable to the student.</p>

<p>5 - Off campus room and board is a qualified expense, up to the lesser of the actual expense or the school’s published room and board figures. Computer and accessories are not qualified expenses unless they are specifically required by the school as a condition of attendance/enrollment.</p>

3

<p>This irs page seems to indicate that computer is ok:
<a href=“http://www.irs.gov/uac/529-Plans:-Questions-and-Answers”>http://www.irs.gov/uac/529-Plans:-Questions-and-Answers&lt;/a&gt;
Does this apply only to 2009 and 2010, or thereafter?</p>

<p>Q. What is new this year with 529 plans?
A. A qualified, nontaxable distribution from a 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access. The technology, equipment or services qualify if they are used by the beneficiary of the plan and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.</p>

<p>Q. What does “computer technology or equipment” mean?
A. This means any computer and related peripheral equipment. Related peripheral equipment is defined as any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer, such as a printer. This does not include equipment of a kind used primarily for amusement or entertainment. “Computer technology” also includes computer software used for educational purposes.</p>

<p>Q. Is this “cost of the purchase of any computer technology or equipment or Internet access and related services” available for any other education benefit under the tax laws?
A. No, it is only for 529 plan withdrawals. Such costs are generally not qualifying expenses for the American opportunity credit, Hope credit, lifetime learning credit or the tuition and fees deduction.</p>

4

<p>The computer thing was only for 2009 and 2010. Any other years, the computer or accessories must be specifically required by the school as a condition of attendance/enrollment.</p>

5

<p>Any comment on my asset and income reporting. Is it correct?</p>

6

<p>found this list of colleges that require computers:
<a href=“http://www2.westminster-mo.edu/wc_users/homepages/staff/brownr/NoteBookList.html”>http://www2.westminster-mo.edu/wc_users/homepages/staff/brownr/NoteBookList.html&lt;/a&gt;&lt;/p&gt;

7

<p>529 accounts owned by students are to be reported as parental assets, on FAFSA . This allows for the 529 fund to be assessed at the the parental rate of 5.64% which is a lot less than the 20% rate on non-529 assets owned by the student. So you could have put the fund in your student’s name and it would have been assessed the same as it would have for FAFSA purposes if you had had your ex take it.</p>

<p>Along with favorable asset treatment, a 529 account also gets favorable treatment in the income portion of the financial aid eligibility formula. A tax-free distribution from a 529 plan to pay this year’s college expenses will not be part of the “base-year income” that reduces next year’s financial aid eligibility which occurs when you, the NCP uses the 529 to pay for the college costs.</p>

<p>However, that is all just for FAFSA purposes. Schools with their own formulas can do what they danged well please, and one has to ask specifically how each one would view 529 assets in a student’s name. Some schools that use PROFILE blatently assess more than 20% of student assets and some will expect any assets first reported to be the baseline kept for each subsequent year even if the student should drain the amount that first year. Schools can do as they please with their own money and give out their aid just about any way they want.</p>

8

<p>@cptofthehouse,
Now it is too late to transfer the 529 plan to the kids name right?</p>

<p>It will be considered income at time of transfer, so no use.
This should have been done maybe 2 years back.</p>

<p>Not that big a deal.
If it shows up as student income, there is some fairness to it, since he is getting the benefit, it should fairly increase his EFC. And since the first $6000 does not affect EFC, not so bad at all.</p>

<p>thanks</p>

9

<p>I have a separate question relative to scholarships and tax-free withdrawals. Can someone explain to me how that works exactly?</p>

10

<p>

</p>

<p>If you can be a bit more specific with your question, that would help.</p>

11

<p>School Cost is 15K
Kid has a scholarship for 5K</p>

<p>If you withdraw 17K,
10K you pay to the school, Obiously Qualified, therefore non-taxable
5K you keep, but still Qualified BECAUSE of the scholarship, therefore non-taxable
2K you keep, would be non-Qualified, therefore tax+penalty,</p>

<p>Is this correct assuming custodial parent?</p>

<p>Is this correct also assuming non-custodial parent? I am thinking maybe not, since child is not dependent on tax return.</p>

12

<p>IRS Pub 970 is the best source of information for this stuff. Rules for 529 plans start on pg. 56.</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf”>http://www.irs.gov/pub/irs-pdf/p970.pdf&lt;/a&gt;&lt;/p&gt;

<p>Remember, any tax and penalty (if applicable) is only assessed on the earnings portion of a non-qualified distribution, since the principal part of the distribution was contributed to the plan on an after-tax basis.</p>

<p>In your scenario above, the 5k that you keep because of the scholarship would be a non-qualified distribution and therefore taxable (earnings portion only), but it would not be subject to the 10% penalty. The 2k would obviously also be non-qualified and taxable and would be subject to the 10% penalty (again, earnings only).</p>

<p>But why would you want to take a 7k non-qualified distribution? Save it for later years, or possibly graduate school, or change the beneficiary to a sibling or other eligible family member to use on qualified expenses.</p>

13

<p>The 7k was for illustration to clarify the issue.</p>

<p>5k would be something I would consider if it were penalty and tax free due to the scholarship.</p>

<p>But you are saying that it is only penalty free. Not tax free.</p>

<p>Therefore I would never consider taking out more than anything that I were paying in qualified expenses.</p>

<p>thanks.</p>

<p>ps - I have some of my other questions out to some college financial aid advisers. In a few days I will come back and summarize all answers I get relative to this subject in a post on this thread.</p>

14

<p>summary of my findings:
Treatment of 529 Plan owned by non-custodial parent (or grandparent) with the student as a beneficiary:</p>

<p>Asset Treatment:
• Not reported on FASFA, since FAFSA only requests custodial parent and student assets.
• Not reported on CSS Profile, since CSS Profile only requests custodial parent and student assets.
• Included in section H3a of the Non Custodial Profile (Noncustodial Parent and Current Spouse’s Assets - Investments - What is the total current market value?)</p>

<p>Income/Expense Treatment:
• Included in FAFSA section 45j - Money Received or Paid on Student’s Behalf
• Included in CSS Profile section SI-160G - STUDENT’S INCOME AND BENEFITS (SI) (Enter the amount of any other untaxed income you received or expect to receive)
• Include in Non Custodial CSS Profile section C6 a. - Noncustodial Parent’s Support of Former Household (Amount you paid or will pay for the student’s education, excluding child support)</p>

<p>Please note the in years after the freshman year, CSS Profile and Non Custodial CSS Profile are not typically requested, but if they were, then the reporting above should be observed. But colleges might require their own forms, and similar asset/income/expense should be reported on those forms.</p>

<p>1 - Regarding transferring the 529 plan to the custodial parent or student, there are too many issues to consider, and for me the best option is to leave things as they are. I will not address this further.</p>

<p>2 - What is the best way to make the payments from the 529 plan?
• Answer: Transfer to Student account, and let the student pay University.
• Why not pay directly to the University from 529 plans?
o Even though the University would prefer this method, unfortunately a few universities have misconstrued non-custodial 529 distributions as an external financial aid, and reduced financial aid packages accordingly. Even if you can eventually convince them otherwise, this is a hassle.
• Why not withdraw to non-custodial parent account, and pay the university?
o This has been reported to generate inquiries by the IRS since you will not be the recipient of the 1098-T.
See <a href=“3 ways to take a 529 plan distribution”>http://www.savingforcollege.com/questions-answers/article.php?article_id=101&lt;/a&gt;&lt;/p&gt;

<p>3 – Report any other cash support to child on Fafsa 45j/CSS SI-160G and Verification Worksheets.</p>

<p>4 – Any Non-cash support by anyone other than the Custodial parent should be reported in Fafsa 45j/CSS SI-160G, and on the Verification Worksheets.
Different financial aid officers and advisers were all over the map on advice on this item. Admitting that this item is frequently under reported, and that federal guidelines are vague. I think as long as big ticket items that would fall more under support than gifts are reported, it should be fine.</p>

<p>5 – What are Qualified 529 Expenses:
Tuition & Fees
On-campus Room & Board
Off-campus Room & Board (lesser of the actual expense or the school’s published room and board)
Books & Supplies (up to school’s published Books & Supplies expense)
Computer+Accessories (only if required by the school)
The rule was different only in 2009 and 2010
List of schools that might require computers:
<a href=“http://www2.westminster-mo.edu/wc_users/homepages/staff/brownr/NoteBookList.html”>http://www2.westminster-mo.edu/wc_users/homepages/staff/brownr/NoteBookList.html&lt;/a&gt;&lt;/p&gt;

15

<p>“5 - Off campus room and board is a qualified expense, up to the lesser of the actual expense or the school’s published room and board figures.” </p>

<p>I’ve never this this before. Do you have a source? I thought it was the published room and board figures.</p>

16

<p>The published room and board figures (as per the COA data) or the actual amount charged if living in school owned and operated housing is the most that can be claimed as a qualified expense under a 529 plan. If the student is living off campus in non-school housing and room and board costs are less than the COA figures, than those actual costs must be used. The student can’t take a tax free 529 distribution for the difference between actual costs and higher COA room and board figures and pocket the money.</p>