529 .vs cash asset benefit

<p>I am a parent of a sophmore in college and received an inheritance part of which was used to replace an overdue roof. Is there a benefit to depositing the remaining amount (@ $20K) into a parent owned 529 plan or just report the amount as a cash asset ? To me it seems like the 529 and assets both have the same percentage applied and added to the EFC. We are not a 0 EFC profile. I am a little concerned about the Fed rules possibly changing Year to Year and how the 529 will be handled in the future.</p>

<p>A couple of things to consider:
There is a protection for a certain amount of assets. For a married couple in their mid-40’s, the first $50K or so of assets are protected, and not counted. (The amount varies by marital status and age of the older parent.) If you don’t have a lot of cash assets it may not matter what form it’s in. Assets over the protected amount are assessed at 5.6%.</p>

<p>Of course, for FAFSA the equity in your primary residence also doesn’t count. It may count in varying degrees at schools which use Profile. Money in qualified retirement accounts aren’t counted by either FAFSA or Profile, I believe.</p>

<p>In my state you can get a nice deduction against state income taxes if you contribute to a 529, so that’s something to consider. </p>

<p>Another thing to consider is that once you put the money into the 529 you are restricting its future use to educational purposes, although I believe the beneficiary can be changed later. So if your first child doesn’t use the money you may be able to designate it for another child or grandchild.</p>

<p>As you probably know, if you deposit in 529, it will grow tax free…taxable if you put elsewhere</p>

<p>You are a parent of a sophomore in college. First question is when do you need the money and second question is which state do you live in.</p>

<p>If you need the money right away, then there is no question of investing. If you intend to use the money in say the last semester of college or for graduate school, then you have some time and hence investment might make sense. So consider your time horizon as there is no tax on the growth as long as the proceeds are used for qualified educational purposes. So the amount you invest grows tax free and this could easily amount a tidy sum.</p>

<p>Second, state of residence matters. Some states allow the depositor to deduct contributions (subject to a maximum) for calculating state income tax. The list below gives the deductions allowed in different states. If you live in Illinois and contribute $20,000 and you are married and filing jointly, and your state tax bracket is 5%, you save $1000. In Arizona for example, the limit is $1500 for married filing jointly and you save $75 on your taxes. </p>

<p>So if you live in Illinois or New Mexico etc. and you are the 5% bracket, you could deposit the money this year, keep it in a money market fund and withdraw it next month and save $500. Again, plan sponsor rules and state rules come in to play and hence ymwv. Please check the rules before you invest in a 529 plan as there could be penalties for early withdrawal and there is always a risk with any investment.</p>

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<p>Finally 529 plans are considered parents assets and hence they will impact the same way for FA as keeping it in your bank. Hence also consider how this inheritance will effect aid in future years.</p>

<p>Looking thru the 2012-2013 EFC worksheet. If I fund a parent 529 for @ 20,000 and use 5K of it to help pay tuition/college cost for the Fall junior year (2012) then this would need to be reported on the Student “2013-2014” income for the following year as total untaxed income ? If so then I guess it comes down the 529 impacting both the parent’s assets (since FAFSA now does not exclude 529 funds but includes it as total assets) and impacting the students income ? </p>

<p>I might be missing something but it seems like the 529 enables double dipping for EFC with the only benefit of a little tax savings on capital gains .vs a non-529 mutual find ? I am in NJ and have another child entering college in about 4 years so the 529 could possibly benefit number 2 and grow tax free. But still having the 529 potentially being dinged at 5.6 % even if it is not used seems counter productive. Maybe this is why some establish UTMAs for each kid and then stage them into 529’s as each student enters college. At least the UTMA for a child not in college would shelter assets from those that are in college ? </p>

<p>A few years I think the 529 use to be xcluded from parents income? Hopefully I am not confusing the matter.</p>

<p>Withdrawals from parent-owned 529s that are used to pay for the student’s higher education expenses are not reported as student income.</p>

<p>Withdrawals from grandparent-owned 529s would be reported as student unearned income - this may be what you saw.</p>

<p>Thanks. Is that documented anyplace? Also would a fin aide office view the available 529 assets in a way to offset total needs basis. I would like it to help with the shortfall and not create a larger shortfall.</p>

<p>^^^^ Not sure I understand the question.</p>

<p>Let us say you have $20000 and use $5000 now and invest $15000 in</p>

<p>a) A bond fund with a 4% yield. At the end of the first year, you have earned 15000*.04 or $600, let say you paid $200 in taxes. So at the end of the first year, you have $15400. 5.6% of this is considered for FA purposes.</p>

<p>b) Invest in a 529 plan with the same yield. At the end of the first year, you have $15,600 in the account as you pay no taxes. So for FA purposes, you now have consider 5.6% of 15600 instead of 5.6% of $15,400. Yes, your contribution goes up by 5.6% of 200 or $11.2. However you have $200 more, so the net effect is still very much in your favor.</p>

<p>So it is better to invest in 529 (especially due to the tax advantages on state taxes).</p>

<p>Would a Roth be something to consider?</p>

<p>A Roth would not be something to consider if he is looking for funding college education in the next 1-2 years.</p>

<p>A Roth cannot be withdrawn till he is 59 and 1/2 years. So if he can lock the money away for some time and he qualifies (there are income and contribution limits) he can contribute, but then has to find other ways of funding his son’s education.</p>

<p>Even if he is close to 59 and 1/2, a 529 would be better as it gives state tax benefits. Again, in some states it does not matter, in others it could.</p>

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<p>Not true. Contributions can be withdrawn any time without penalty. Only ‘earnings’ will be subject to penalty if withdrew before 59 & 1/2.</p>

<p>Is a ROTH something to consider in the case of OP? May be, may be not, we don’t have enough information to comment on that.</p>