The described 529 distributions are not reported as income for either the parent or the child beneficiary. The 529 account balance is reported as a parent asset.
@BelknapPoint aren’t the distributions included in subsequent FAFSA forms? Or is that only for grandparent owned 529 accounts?
Distributions from a student- or parent-owned 529 are not reported on FAFSA or Profile as untaxed income.
Thanks @BelknapPoint
Back to the original OP question – I have a DS who a freshman with a grandparent-owned 529. We are waiting until 2nd semester sophomore year or even junior year to use the funds. It is giving us a tough 2 years (basically I am depleting my S-Corp funds – taking out more than I am making) but it also appears to be the way to maximize financial aid. My sons are the only grandchildren and therefore I am absolutely certain they will not be disinherited.
For those of you who have children with disabilities – one way around this is to set up an ABLE account and put some of the 529 funds in there.
But doesn’t the Profile ask if the child had or expects any assistance from another source? So it would make more sense to wait to use it until 2nd semester soph year - or even until junior year, so it isn’t applicable for the application for aid for senior year?
Also, @psycholing - while your sons may be the only grandchildren, the grandparents could technically give it to the paperboy, or their neighbor’s kid, or anyone else, if they wanted. Additionally, if they needed the funds for a major illness, or long-term care stay, it would be available to them - and an asset before medicare. These may be small risks, especially if your parents are very healthy, but its important you be sure you understand the risks involved.
@3puppies Sure the grandparents can suddenly shift personalities completely and withdraw support for their only grandchildren – but it is about as likely as me shifting personalities tomorrow and withdrawing my support for my children. Perhaps I should worry about that as well and put my money in an irrevocable trust? After all, brain tumors can happen, and they can cause a personality shift. Or my husband could run off with another partner and give all our money to that person’s children. So perhaps I should shelter the money from him…
There are no guarantees in life and we all to some extent play the odds.
Note – you are right about the question. We are assuming my son will get no aid Senior year, and possibly not Junior year, unless one of us parents lose our job.
@psycholing - forgive me, I meant to add that I am sure you understand this already, I was writing to clarify the issue for the perhaps dozens of others who might read this thread after us. The issue of grandparents’ health is very difficult to predict. There have been other threads by families who thought they were being wise by using their own funds before a grandparent, only to get stung twice when the grandparent faces unexpected, significant medical costs, wiping out what was intended to go to junior.
Congrats on being in a enviable financial position such that your son will not need aid for his final year or maybe two.
@3puppies Thanks for that clarification. I also could not imagine my mom shifting beneficiaries because she is very close to my children and they are also the youngest of all the grandchildren. However, I did not think about the health/death issues. I think I am the one who will “inherit” the 529’s but I should probably confirm.
@BelknapPoint Reading this thread with much interest, are 529 distributions counted as income at all for FAFSA? I see the untaxed specified, but wanted to make sure I understood. I was also thinking that the 529 withdrawals should occur in the last 2 years, but maybe there’s no need to wait if it’s not counted as income.
529 money used for the student’s benefit that comes from a 529 owned by someone other than the student, or a parent whose financial information is reported on FAFSA, must be reported on FAFSA as untaxed income received by the student. The most common situation described here would be a grandparent who opens a 529 for a grandchild. Any distribution from this 529 for the benefit of the grandchild/student must be reported on the student’s FAFSA as untaxed income received by the student. Note that the assets in such an account are never reported on FAFSA.
If a 529 account is owned by the student or a parent whose financial information is reported on FAFSA, distributions from the account are not reported on FAFSA as income, but the assets in the account are always reported on FAFSA as a parent asset.