Best strategy for Grandparent-owned 529 in light of new prior prior year accounting?

Paying for College
1

My daughter will enroll as a freshman this fall and, happily, her grandparents started a 529 with her as the beneficiary some years back. She has several younger siblings and we have already discussed dividing the existing money with a roughly equal share for each (perhaps accounting for a longer investment horizon for the younger ones).

Let’s say my daughters share will be 20K total.

Other relevant info: We just filed our first FAFSA. Our EFC is 0 (low income, large family). Pell grant is 5920. My daughter had no income in 2015 (the base year) and, as previously stated, our family income was quite low - well under 25K (a TOUGH year in a capricious business).

I’ve learned about the grandparent-owned 529 “trap” - where a distribution this year will be counted as un-taxed income for my daughter and could reduce her 2019-20 FAFSA (base year 2017) award by 50% of the amount above the $6260 income allowance. However, I believe with some planning, we could keep her income for 2017 - including the potential 529 distribution - below that allowance. So her grandparent’s continued ownership might not be a problem with regard to a 2017 distribution.

The 2020-21 FAFSA (base year 2018) could be another matter. IF we believe that her 2018 earnings + a 2018 grandparent-owned 529 distribution will put her significantly above the $6260 income allowance, what is (roughly) the latest date we could transfer money from the grandparent-owned 529 into a new account with her as the owner and have that change be timely? Anytime before the 2018 distribution?

I apologize if any of this isn’t clear or is needlessly redundant. I feel like I’ve been drinking from a fire hose with all I’ve learned in the last few days.

Here’s a crude way of explaining what I have in mind for my daughter. I would be very grateful if anyone can point to problems (of which there might be many!).

2017-18 FRESHMAN
– 2017 Grandparent-owned 529 distribution (roughly 5K) + daughter’s 2017 working income < $6260.
– No impact on 2019-20 FAFSA, because under the income allowance.

2018-19 SOPHOMORE
– 2018 Grandparent-owned 529 distribution + daughter’s 2018 working income might exceed $6260.
– SO, have grandparents establish a new 529 account with next oldest sibling as beneficiary, then transfer ALL money EXCEPT about 5K needed for 2018 daughter distributions.
– make daughter owner of original account, now containing roughly 5K.
– liquidate the 5K account after daughter becomes owner.
– Impact on 2020-21 FAFSA would be to increase EFC by $282 (5000 x 5.64%) because the original 529 is now her asset.

2019-20 JUNIOR
– Grandparent-owned 529, now with next oldest sibling as sole beneficiary, makes 2019 transfer of roughly 10K into new grandparent-owned 529 account, with daughter as beneficiary.
– New grandparent-owned 529 with daughter as beneficiary makes makes 5K distribution in 2019.
– Assuming no graduate school, no impact on future FAFSA

2020-21 SENIOR
– Grandparent-owned 529 with daughter as beneficiary, now with balance around 5K, makes its final distribution in 2020.
– Assuming no graduate school, no impact on future FAFSA

Obviously, real life could throw some curves… but does this seem workable?

THANKS for any help/advice!

2

If your D has $20k for college from grandparent 529, that would be $5k for 2017, 2018, 2019, 2020.

What she earned in 2015 is on the 2017/18 FAFSA, you said that was $0

What she earned in 2016 is on the 2018/19 FAFSA, so still $0?

What she earns in 2017 and the money paid on her behalf from grandparent 529 in 2017 is on the 2019/20 FAFSA, so $5k plus work earnings

What she earns in 2018 and the money paid on her behalf from grandparent 529 in 2018 is on the 2020/21 FAFSA, so $5k and work earnings.

Is she not going to work this summer? With a $0 EFC and the $5k from grandparents, does she have all college costs covered?

The FAFSA income protection amount for a dependent student for the 2017/18 FAFSA is $6,420 I believe plus deduction for federal, state and soc sec taxes paid.

3

If she has earnings from federal work study, the FAFSA would subtract that from her income in question 44c.

4

Thanks, mommdc.

If your D has $20k for college from grandparent 529, that would be $5k for 2017, 2018, 2019, 2020.
– Correct

What she earned in 2015 is on the 2017/18 FAFSA, you said that was $0
– Yes

What she earned in 2016 is on the 2018/19 FAFSA, so still $0?
– Yes

What she earns in 2017 and the money paid on her behalf from grandparent 529 in 2017 is on the 2019/20 FAFSA, so $5k plus work earnings

What she earns in 2018 and the money paid on her behalf from grandparent 529 in 2018 is on the 2020/21 FAFSA, so $5k and work earnings.

Is she not going to work this summer? With a $0 EFC and the $5k from grandparents, does she have all college costs covered?
– She WILL be working over this summer. If she earns enough to put her over the income allowance, we can reduce the grandparent 529 distribution to stay under it (which leaves more 529 money for later use). She will get close to covering all costs because she is going to a GA public school and qualifies for the GA HOPE merit scholarship. Between that, Pell, 529, and another private scholarship… she’s getting close.

The FAFSA income protection amount for a dependent student for the 2017/18 FAFSA is $6,420 I believe plus deduction for federal, state and soc sec taxes paid.
– That’s good to know. I’ll check on the revised allowance amount. Are you saying that any fed, state, and ss taxes she pays on her 2017 earnings are deducted from the total when determining if she is above or below the income allowance threshold?

5

Thanks, mommdc!

If your D has $20k for college from grandparent 529, that would be $5k for 2017, 2018, 2019, 2020.
– If distributed evenly, yes.

What she earned in 2015 is on the 2017/18 FAFSA, you said that was $0
– Yes

What she earned in 2016 is on the 2018/19 FAFSA, so still $0?
– Yes

What she earns in 2017 and the money paid on her behalf from grandparent 529 in 2017 is on the 2019/20 FAFSA, so $5k plus work earnings

What she earns in 2018 and the money paid on her behalf from grandparent 529 in 2018 is on the 2020/21 FAFSA, so $5k and work earnings.

Is she not going to work this summer? With a $0 EFC and the $5k from grandparents, does she have all college costs covered?
– She WILL work this summer. If she earns enough to put her over the income allowance, we could lower the 529 distribution accordingly, reserving that money for later use. She is getting close to covering all her costs, thanks to relatively low-cost GA public school and her qualification for GA HOPE merit scholarship. Between that, Pell, 529, and another private scholarship, she is getting close.

The FAFSA income protection amount for a dependent student for the 2017/18 FAFSA is $6,420 I believe plus deduction for federal, state and soc sec taxes paid.
– That’s good to know. I will check on any revisions to the income allowance. Are you saying that any fed, state, and SS taxes she pays are deducted when determining whether she is over/under the income allowance?

6

If she has earnings from federal work study, the FAFSA would subtract that from her income in question 44c.

– mommdc, are you saying that if she participates in FWS, those earning will need to be reported via question 44c of the relevant year FAFSA… but they are NOT counted toward the income allowance?

I’d like to understand this, because we have asked that my daughter be considered for the FWS program this fall.

7

For purpose of eligibility for financial aid, FWS earnings are excluded from the income calculation. That’s a benefit of taking a FWS job instead of a non-FWS job.

8

Yes, when she reports her 2017 AGI on her 2019/20 FAFSA, if some of her income is from FWS, it will be subtracted from total income by entering FWS income in question 44c on the FAFSA.

The taxes paid are a deduction from income after the income protection allowance applies. In her case that probably won’t be much, because under $6,300 she won’t owe any federal tax, but maybe some state tax, soc sec tax on summer job.

Since she has a private scholarship as well, you could also move the 529 payment from grandparent possibly into the second year (2018), and it won’t need to be reported as part of her income until the 2020/21 FAFSA.

There is another thing to consider, if she has Hope, Pell, and private scholarship and the total of grants and scholarships exceed the cost for tuition, qualified fees and books, then that will be taxable income for her.
For FAFSA that can be subtracted from student income as well, by reporting the amount of taxable scholarships that was included in AGI and reported on tax return in FAFSA question 44 d.

9

https://ifap.ed.gov/eannouncements/071416EFCFormulaGuide1718.html

Here is the 2017/18 EFC formula guide, it has parent and dependent student worksheets and tables for parent income protection allowance, parent asset protection allowance, and state tax rates, etc

10

I think people are confusing income for tax purposes, income for FAFSA purposes, and something that isn’t income at all. If the grandparents pay the tuition from their 529 plan directly to the school, the student would have to report that in a future year as amounts paid by others on the FAFSA. That money is not reported on the student’s taxes as income or on the FAFSA under student income. It’s not income. It is reported on the FAFSA in another section and will affect the EFC, but not the taxes. It is not on the student’s FAFSA calculation as part of the $6250 limit on earned income. It’s not earned income. It’s a gift.

For the original post, I don’t think moving money between the 529 plans of grandparents and other children matters and seems overly complicated. If the grandparents pay an amount on behalf of the student, it is considered in a different way on FAFSA, not income and not an asset. If the grandparents are the owners of the 529, I think only the amount actually paid in that year is reported, not the corpus of the account, not the accounts owned for siblings or cousins or even other children of the grandparents. I don’t think the total amount in 529’s of grandparent owned 529s have to be reported on the beneficiary’s FAFSA, only the amount actually received that year for payment. It is not an asset, so doesn’t get the 5.6% ‘protection’ and the formula for determining EFC is going to take the entire gift into consideration. Granny and Gramps paid $20k as a gift? The EFC is going to take a hit.

Is there a way to get the grandparents’ 529 money directly to the parent, and then the parent pays the school? Then there is no assessment against the student. It’s just money gifted to the parent, who then pays the bill. I’m not sure if the 529 rules allow that.

11

We aren’t talking 20K per year, twoin… by my math we are talking 5K per year per child. And it seems like there’s only upside- since it’s not clear that absent the 5K coming from the grandparents, it would be replaced dollar for dollar by more aid.

Many people assume that an extra dollar coming from a grandparent only replaces a dollar which would have come from financial aid. There are an awful lot of assumptions that would go in to that calculation- most of them not borne out by reality given how aid works at the vast majority of colleges which do not meet full need.

12

I don’t think you can transfer parts of the 529 to a ‘new account’. You can transfer ownership of the entire account to the daughter and it would be assessed at the parents’ asset rate of 5.6% (after asset protection amount, so it may not even be assessed at all in the FAFSA formula), and as owner they can name new beneficiaries.

Your parents need to check with the 529 administrator to see what the options are.

13

@twoinanddone

I did not say that the amount from grandparents paid on student’s behalf, was work income, or taxable income, but I assume that the FAFSA since it asks that question, includes that money in the eligibility income of the student and contributes to EFC (after any allowances).

The only thing affecting EFC is either income or assets.

This is income, not work income, not taxable income, but reported under untaxed income in question 45j (money received or paid on student’s behalf).

So then how does the 2017/18 EFC formula that I posted a link to upthread treat this?

On page 10, the regular worksheet A, page 2 has the student AGI listed at the top, then income from working, then taxable income. Then untaxed income from question 45a-45j (where the amount student received from grandparents on her behalf goes), then total taxed and untaxed income, then it subtracts items from question 44a-44f (where FWS income would go from question 44c and taxable scholarships reported in AGI from question 44d).

So then we would have Total Income.

Then under Allowances we would have US income tax paid, state tax and soc sec tax paid on the income from working, and then the income protection amount of $6,420.

So total income minus allowances would be the available income, which would be assessed at 50% towards EFC.

14

Of course this would not come into play until the 2019/20 FAFSA, if grandparents paid college from 529 in 2017, or the 2020/21 FAFSA, if they did so in 2018.

15

Re: post #12

Disclaimer: household size and number in college also affects EFC, but in this context, for this student, her EFC contribution comes either from income or assets.

16

If the EFC on the FAFSA is $0, how are you getting it? Auto $0? Simplified assets? If so, the student’s income and assets will not be considered so all this is for naught.

17

Yes, if the OP qualified for auto zero EFC, then student assets and income would not be counted.

But that would have to be true for every FAFSA in the next 3 years as well, for the student income not to matter.

With simplified needs, only assets aren’t counted.

18

Are you sure? We had simplified needs on year and I did not enter income for my kids. The next year I did, and assets too, but only because we’d moved and the new state required it whole olD state dI’d not care. Made no difference for efc.

19

Was this an auto $0 EFC? If so, student income is not reported…and no assets are reported.

20

Hoping @BelknapPoint responds!!