<p>The benefit of the grandparents owning the 529 plan is that none of it is counted as assets for financial aid. The problem comes the year after the money is distributed to the student to pay the tuition. That becomes income for the student, and ups the subsequent year EFC. That is also the problem with using sheltered plans that belong to the parent or kids, such as a Roth IRA. The minute you take the money out to pay the tuition, it becomes income for the subsequent year, so you get a one year advantage in that planning. I have told parents to borrow the danged money from PLUS or other low interest loan plans, or take a home equity loan, and pay the money back after the kids are finished with college if you possibly can if you are getting some nice financial aid.</p>
<p>Jamimom: are you sure about the Roth IRA withdrawals counting as income? (Got a vested interest here. I just pulled a little bit out to meet the last tuition bill.) Since my (tiny little) Roth IRA is actually worth a little less than when I invested the money, there is no gain - it is all principal, and as such, can be withdrawn with no penalty or taxes. Why would it count as income?</p>
<p>Yes, pretty sure. It does not count as income for taxes, but the withdrawal is income for FAFSA. Google "Roth IRA"; financial aid , and you'll see it all spelled out. Just as contributions to a qualified pension plan are deducted from income for tax purposes, but are added back in for financial aid purposes, distributions from any of these plans are counted as income for financial aid purposes.</p>
<p>Yes, it looks like you are right! :( Oh, well. I withdrew in 2005, so it won't make a difference in next academic year's financial aid, and it was only $2000. - so 5% of that is only.... $100. increase in our EFC?? (Am I figuring that correctly?) I'm someone who hates to borrow money, so I would rather "pay as I go" using available assets, than borrow with a PLUS loan. By the time you pay origination fees, etc. it seems like such a waste.</p>
<p>529s are a great deal for people who DON'T apply for aid.</p>
<p>Jamimom:</p>
<p>one other source for borrowing is a margin line of credit if one owns any stocks. Instead of selling the stocks, which becomes income in that year and reduces efc, its worth considering margining those stocks and paying tax deductible interest, and selling when Jr gets outta college.</p>
<p>I can do hypotheticals for you but you won't believe the results. People will want to hear what they want to hear. Thus, I urge EVERYONE to go buy a tax program (it only costs $12) and do FAFSA at least 2 years before college and get Quicken or MONEY. Play with the financial programs and 1040 tax and FAFSA to do what if senerios (spreadsheeting) Its a bit of work but not only will you figure out how to pay for college AND you will figure out how you will live in retirement. </p>
<p>On the chance that you do believe me...
1. Use 529 only to capture your state's tax deduction.
2. Use Coverdells only if you have a 5 year or more time horizon.
3. Use EE bonds for 10 year horizon
4. Use UGMA's if kid is still in grade school or if kid has taxable income from wages.
5. Use property if you are willing to sell it or able to get rental income.
6. Use trading account (best) to pay least in taxes, essentially $0 taxes on dividends, defer taxes or reduce taxes through capital losses AND only if you understand your risk tolerance.
7. Use Passbook savings if you don't understand.
8. Don't believe everything you read or hear. Even mine.</p>
<p>All the above have trememdous risk at certain points in the economy and your life cycle. You need to analyze your income, your risk tolerance, and the merits-faults, of all the programs AT THE SAME TIME, to make an intelligent decision</p>
<p>Sounds like good advice to me. I'm pretty much a financial simpleton, but it seems to me that 529s etc. work for people who have so much money that they would not qualify for financial aid at high cost schools, OR for people who might be middle class and their kids will attend in-state schools and families won't qualify for aid. If you're middle class and kid is looking at $40,000/ yr. education, it doesn't seem to make sense to put parent's savings into a child's name. (No one should be taking financial advice from me, this is more of a question for people with more knowledge).</p>
<p>529's work for everybody. It just may not be the best method for everyone. </p>
<p>The premise of all tax qualified programs, Social Secuity, 401k, IRA, Coverdells, 529, annuities, cash value life insurance, UGMA's, defined pensions that - people just don't save or invest enough by themselves and consequently there must be a gimmick to get you to save and invest. The more tax qualified the program is - the fewer options that you will have. The inverse is that the more options you have - the more risk you take. </p>
<p>Barf.</p>
<p>No, Anxiousmom, it's more like 30% or whatever your marginal parental contrbution rate. It is about 5.6% of assets, but about 25-35% of income after certain threshhold levels. Any plan distribution becomes income, not an asset. It becomes both if you let it sit in the account. It is better to borrow the money if your child is on financial aid with interest rates as they are currently and withdraw from the Roth to pay the loan when financial aid is no longer an issue.</p>
<p>You are not looking hard enough. Not all PLUS lenders charge a fee, and they still have excellent programs. </p>
<p>The max the PLUS lenders can charge is a 3%. You have no quams in getting a home loan which has at least a 3% hidden cost in the loan besides the external fee you pay to the broker, plus the negotiatable closing costs that everyone pays because its customery. Do you think Donald Trump got wealthy because did or did not pay fees?</p>
<p>Do you think that buying a car on a no interest car loan is any cheaper than getting a loan with interest? </p>
<p>What I'm saying is that you must make a mulitude of comparisons. Never let a broker shop for you. YOU SHOP!!</p>
<p>barf barf.</p>
<p>I would agree with jamimom #30. Never withdraw from 401k, trad IRA, or Roth (unless its the kids program). Here's why-1) Withdrawn tax qualified money becomes current year income. Therefore if you are in the 27% marginal bracket- for every $100 withdrawn, you pay 27% in taxes and therby net just $63. Now does a PLUS loan at 5.5% (best credit & possible by July 2005) cheaper than 27% tax rate? AND the PLUS loan interest is deductible from your gross which makes the 5.5% really a 3.46% loan, with a free life insurance thrown in. </p>
<p>Please consult your tax professional or financial guru who is Knowledgeable AND Competent. Better yet do trial FAFSA's and taxes on your computer. FAFSA does not necessarily penaltize you for contributing or having IRA's and 401k's</p>
<p>If your student is on financial aid, withdrawals from any plans which are exempt from being included in the assets for financial aid purposes is income, whether it is the parents' or the students'. For Roth Iras there is no tax liability to use the money for college, but it does have to be included as income in the subsequent year's financial aid apps. Perhaps, to pay the last year's tuition rather than taking out loans. It is really pretty complicated when you have assets and don't want to use them. Like having your cake and eating it too.</p>
<p>JUst out of curiosity, how would you know to include the Roth distribution $ by looking at the form? If it is a distribution of the basis, then the money was already income when it went in, so it would not show up on your tax return would it? Does FAFSA ask about distributions? Or would it count as $ paid on the students behalf or "other income received & not reported elsewhere?</p>
<p>Thanks for the advice. I should have done my research before withdrawing the money. I assumed that since the money was already mine, it wouldn't count as income - as in new money coming into my life. My bad. And I really don't want to have my cake and eat it too... I'm not opposed to spending our assets for our kid's college - it's just that our ROTH IRA's (now worth less than 10K) are our only savings. We are quite frugal, (used to be more so, now fallen a little by the wayside), and very loan adverse. Oh well! It won't affect next year's financial aid, because I withdrew in 2005, and in the grand scale of things it's a fairly small amount. Thanks again for all the advice! I think I'll go knead some (cheap to make) bread and heat up the beans. ;)</p>
<p>When you are filling out FAFSA, I believe it is Worksheet B that asks for all distributions form IRAs and other pension or 401k plans. It refers to line items on the 1040 as well. On the 1040, though the distribution is reported, it is not taxed unless you dip into the income part of the account. For financial aid, it's a different story. You need to add all distributions whether they are taxable or not. You also need to add your contributions to any 401k or IRAs that you deduct from taxes.</p>
<p>How are loans handled? Is there a difference on the next years' FAFSA if you borrow to cover expenses....as in student loan vs refi vs equity line vs borrow from family? Are some vehicles a better choice for finaid than others? DO the loan proceeds get reported on the FAFSA?</p>
<p>Also, how do ya'll handle it if you set aside $$ for this school year's tuition and R&B and some of it is still in the bank awaiting the due dates, so it looks like an asset when filing the FAFSA for next year?</p>
<p>Loan proceeds don't get counted on the FAFSA except for any increase in your cash balances. E.g., if you borrow $50K and still have $50K in cash at reporting time, your assets will include the cash. The downside of borrowing to pay tuition is that your assets aren't reduced. In general, it's a good idea to pay down the student's assets first, then liquid parent assets. Obviously, the family has to maintain some liquidity, so at some point borrowing starts to make sense. I'm not a fan of parent IRA withdrawals to pay for college.</p>
<p>Anxiousmom - maybe you can write an explanation of this to the college - that you withdrew this money before fully investigating what would be best because you're reluctant to borrow and now see that it adversely impacts the numbers churned up by FAFSA. It might temper their offer. FinAid offices must know all the 'tricks' and I can't believe they would look on you negatively for pointing out one way in which the rules have hurt you when you were trying to do the right thing. (I'm not implying that you are 'tricking' anyone; just that I'm sure they sometimes deal with less than honorable people and hope they have learned to see the difference).</p>
<p>WE HATES IT, MY PRECIOUS! WE HATES IT FOREVERRRRRRR!!!</p>
<p>(Thank you for letting me vent about FAFSAs and Profiles to 8 colleges, three college-specific forms, IDOC, and tax returns - I have to send all these envelopes tomorrow & I'm spending all day wrapping things up). </p>
<p>Not to mention I don't have my W-2 yet, stupid %$@$%@%!# company is late, and I think I messed up the Profile re: W-2 box 12 for 401K - I think I put down the entire gross wages and then listed the contribution amount which is added back. I had a dim awareness that this might be happening but didn't really get a clue until after I submitted. I suppose I have to correct on paper and mail ???</p>
<p>On the 529 plan for grandparents, what about having them open an account, put the $11K per year into it, then cash it to pay the last year's tuition when it no longer matters? Hmmmmmmmm, graduate school - 529 funds could be used for graduate school also...........</p>