529 Plans and grandparents

<p>For the past few years we've given our son money to put in his daughter's 529 plan. This time I began to wonder if his old private liberal arts college would actual include a part of that 529 plan when computing family contribution. He's certainly going to need help by the time she's a freshman. I was surprised to be told they would include 12%. I then asked what they would include if I, the grandparent set up a 529 plan for my grandaughter. While warning me that of course things could change in the next 10 years, at least for now, none of it would be included. So if we had been lucky enough to contribute $100,000 over the 10 years, that could make a $12,000 difference in the package.
I don't think state universities count 529 plans, but I would like to hear if anyone else has knowledge or experience with how either private or public universities handle this. Thanks.</p>

<p>FAFSA (the federal application) is used by all schools (public and private) and it does not ask about grandparent assets. --If you are the account owner, it’s your asset even if your grandchild is the beneficiary.</p>

<p>Some private colleges also require an application called the CSS Profile, and it does ask about any accounts held by others listing the student as a beneficiary. How that resource is assessed can vary by each individual school.</p>

<p>At FAFSA only schools though there is also some unclarity. The first year it’s a non-issue since it isn’t reported. In subsequent years, though, there is some dispute about whether any funds contributed from such an account get counted as untaxed income to the student.</p>

<p>A student I’m working with at the high school asked me this same question because she has a small amount of money a grandparent saved for her. Here’s an article I found, but I’m not sure how to interpret it. (I’m not too tax/money savvy --never had to be-- if it makes sense to you, I’d love to hear it explained.)</p>

<p>[FinAid</a> | Saving for College | Section 529 College Savings Plan Loophole](<a href=“http://www.finaid.org/savings/loophole.phtml]FinAid”>http://www.finaid.org/savings/loophole.phtml)</p>

<p>Another issue is that a 529 account held by grandparents would be treated as an asset for Medicaid qualification purposes (as I have learned due to unfortunate circumstances in which my kids’ other parent is going into a nursing home). Since the owner of the account has the right to cancel it to withdraw the money, the value of the account is considered as an asset of the owner. It may be safer to have the 529 account held by parents as a form of insurance, depending on the health of the grandparents.</p>

<p>Of course, grandparents face the same risk that monies given to a grandchild are going to be viewed as assets during any Medicaid look-back period, whether they are funding a 529 or giving the money outright. </p>

<p>This is all very complicated. I suppose the odds of having to face Medicaid applications is somewhat remote for most people, but this could potentially be very serious for some families. In our case, I potentially face the loss of our kids’ college savings unless I can retain it within the spousal share of property that I will be allowed to keep, subject to a cap…although by saving our kids’ 529s, I will lose other assets that are potentially needed for spousal support. This stinks.</p>

<p>‘rentof2 is correct; FAFSA doesn’t require grandparent-owned 529s to be reported. In my case, my sons’ grandparents live in a state that allows a state income tax deduction of up to $2500, so it’s a win-win for them to set aside $2500 in a state-sponsored 529. My own state isn’t nearly as generous.</p>

<p>Any parent- or child-owned 529s are assessed by FAFSA at the rate of 5.6%. What this means is that if there is $10,000 in the 529, $560 of it is expected to be used for that year’s qualified educational expenses.</p>

<p>State universities typically require FAFSA to be filed, so parent and child 529s would be reported.</p>

<p>If you were told by a college that they assess 529s at the rate of 12%, then they’re probably using the Profile form and can assess 529s however they want.</p>

<p>I don’t know what percentages are involved per FAFSA/Profile. But…</p>

<p>I ran two scenarios on the College Board website, one including my childs 529/UGMA, and one without. The difference between the two answers was exactly 25% of my childs assets, suggesting that we would qualify for those dollars from FA if he did not have the assets. </p>

<p>So, I stopped contributing to my younger Ds 529.</p>

<p>Did you plug the value of the 529 as a child asset or as a parent asset in the calculator? That makes a difference of 5.6% vs 20% (it used to be 25%) in assessed value. All 529s, even those for the benefit of the child, are reported as parent assets.</p>

<p>I believe 529 accounts are treated as the parent’s asset in the federal methodology and the child’s asset in the institutional methodology. So it would be 5.6% for the FAFSA and 25% for the PROFILE.</p>

<p>This is my understanding:
Parents of kid do not have to count funds controlled by grandparent.
Depending on the state, it is to everyone’s advantage for parents and grandparents to have separate 529s since some contributions can be deducted.
The contribution to the 529 can count a gift to the kid being funded - limit to $12.5K if you give nice birthday and Christmas gifts.<br>
Money in 529 may be tapped before Medicaid, but it also bypasses estate.
You can pay tuition separately from 529 contribution as long as it is directly to the college.
I have heard nothing about withdrawals from 529s being taxable as income. That would make them not a good idea.</p>

<p>I don’t believe it’s that it would be taxable, Granny, but that maybe they would be counted as “untaxed income” to the student, which would then affect their financial aid in the following year. But I’m not sure how that works.</p>

<p>Granny, your understanding isn’t quite right. I’m a big fan of 529 accounts, but let’s be clear on how they can and can’t be used. To clarify:</p>

<p>529s owned by grandparents for the benefit of the child are not reportable on FAFSA but they are reportable on the Profile.</p>

<p>In many states, no contributions are deductible from state income taxes. Some states are very generous with deductions; many do not have deductions allowed. </p>

<p>There are no federal contribution limits to 529s, but states might have their own lifetime limits. Contributions to 529 plans are considered gifts under the federal gift tax rules. The annual gift exclusion for federal taxes is $13,000 in 2009. There’s a 5-year carry-forward option so that someone could contribute $65,000 in one year with no tax consequences to the giver. </p>

<p>Withdrawals from 529s are tax-free to the extent that the funds are used for qualified higher education expenses.</p>

<p>Edited to add:</p>

<p>Withdrawals from a 529 owned by the parent or student are not reportable on FAFSA as untaxed income. Withdrawals from a 529 owned by a third party may be reported as untaxed income on FAFSA. The Dept of Education needs to provide clarification on this. In the meantime, if those withdrawals of 3rd-party 529s can be made during the student’s last year of college, the issue can be avoided.</p>

<p>529 accounts are reported as parent assets in FAFSA whether owned by the parent or the student. This is a good thing as in FAFSA parent assets are assessed to the EFC at a maximum of 5.6% (may be less after parent asset protection allowances) while student assets are assessed at 20% (dependent students have no asset protection in FAFSA).</p>

<p>Currently grandparent owned 529 accounts are not reported. That may change of course.</p>

<p>Withdrawals from 529 accounts are not taxable as long as they are used to pay qualified education expenses. If withdrawals are used for non education expenses they are taxable plus incur a 10% tax penalty. There are some exceptions - for instance if the money withdrawn is not used for qualified education expenses because the student has received scholarships then the withdrawal is taxable but does not incur the penalty. </p>

<p>IRS publication 970 has all the rules and regs and specifies what is considered a qualified education expense. Make sure you read the correct section - some expenses are considered qualified expenses for certain tax benefits and not for others (for instance room and board is for 529 account withdrawals but not for the Hope tax credit).</p>

<p>Sorry to ask basic questions but I hadn’t looked into this at all, as we figured we’d wait until we found out where DS would be attending first. Anyhow,</p>

<p>Does it make sense to withdraw the entire amount the first year (those darn private school tuitions) so that it doesn’t impact future year calculations? Yes, it would all be qualified expenses.</p>

<p>Are UGMA 529 treated same as regular 529?</p>

<p>Yes, I did do it as kids assets in the calculator, and that’s likely why it came out that way. Good to hear it may be better than I’m thinking at least for FAFSA.</p>

<p>OP, sorry for the minor detour off topic.</p>

<p>UGMA 529s are treated the same as parent-owned 529s.</p>

<p>As far as withdrawing all 529 money the first year, that’s not necessarily wise because then you give up the benefits of another 3 years of tax-free earnings (assuming the 529s are in age-based allocations, mostly interest-bearing investments, but even some equities will most likely have a positive return over 3 years). If you have $40,000 in a 529, it adds $2240 to your EFC. If you have $40,000 in a student’s savings account or UGMA, it adds $8000 to your EFC. If the choice is between spending down savings in the student’s name vs spending down a 529, the best bet is to spend down any savings that are in the student’s name. But you’ll have to run the calculations and see what makes most sense for your particular situation.</p>

<p>For FAFSA it also depends what other reportable assets you have. If your reportable total below the protected asset allowances then they will have no effect on the EFC.</p>

<p>Thanks for all the input. I’m hoping you’re correct, swimcatsmom, that currently Grandparents 529 plans for grandkids are not reported. I don’t see a downside for setting it up, because it will either be a savings or it will be treated the same as if I gave it to my son.</p>

<p>anyone know the specifics on front loading a 529?..I’ve read that a couple can front load $130k per kid, but then not contribute the next 4 years…I get that.</p>

<p>My question, what my wife and I contribute say $50k total this year to one account. We are allowed to front load $130k…does this mean we can still contribute $20k for the next 4 years without incurring federal gift tax? ($130k - $50k =$80k/ 4 years = $20k)…OR…since we front loaded any contributions in years 2-5 would incur federal gift tax?</p>

<p>The 5-year carry forward option, if used in its entirety in year 1 ($130,000 total), means that any additional gifts that you make in the five-year period are then subject to the gift tax or GSTT (generation-skipping transfer tax). If you don’t use it in its entirety, then you can make additional contributions in subsequent years.</p>

<p>These limits are per beneficiary, by the way.</p>

<p>Edited w/more information:</p>

<p>When you elect to use the 5 year rule, you report on Form 709, and the amount you contribute is then allocated 20% for each year. For example, if you contribute 50,000 under the election, it is deemed 10,000 per year. You then have another 3,000 left to contribute per year if you want to. This applies to each spouse. You do not have to file the 709 for the other 4 years unless you make another 5 year election, or have another need to file, such as exceeding the annual limit for that year.</p>

<p>If you fund a 529 in this way, you won’t reach the $130,000 max because years 2-5 will be limited to $3000/year.</p>

<p>If you exceed the 13k including the election allocations, then the excess is deducted from your 1mm lifetime limit. You must file the 709, but no current gift taxes are due until you exhaust the 1mm.</p>

<p>Thanks for the reply…just to be clear, it would be $130k total over a 5 year period in any amounts.</p>

<p>For example: we gave $50k this year…could we give $50k next year, then $30k the year after? Then, the next 2 years we could not contribute without incurring federal gift tax?..Then it would start over again after the 5 years?</p>

<p>You can give $50K in year 1; it gets allocated at the rate of $10K/year. You can give $3000 in years 2-5 which will bump you up to the $13K/year limit under which there’s no gift tax. </p>

<p>In year 6 you can start over with another $50K gift.</p>

<p>wow…I guess we screwed up then. We threw in an extra $25k this year for a total of $50k in one account. So, now we(husband and wife) can only give $16k per year for the next 4 years…any more and it incurs federal gift tax complications? Do I have this right?</p>