I have some questions about child assets and moving them to a 529 account owned by the parent.
We have one daughter that is a freshman in college and another that is a freshman in high school. Our younger daughter is working, and saving her income (currently in a non-529 account in her name) for college. We have 529 accounts for both daughters (parent owned). We will only have one child in college at a time.
Can our younger daughter keep her savings in her name until the year we file the FAFSA for her freshman year (so it doesn’t increase our EFC for our oldest daughter), at which time she transfers her savings to her 529 account (parent owned) to minimize our EFC when she starts school? The amount we are talking about is not large - I am guessing the amount will be in the $6,000 range. Is this allowed? Would there be any income tax ramifications?
The student can open their own 529 listing themselves as the beneficiary. Changes made in 2017 now consider 529s whether student or parent owned to be counted as parent assets for FAFSA.
You don’t report the student owned 529 on the parent portion of the FAFSA, it is reported on the student portion, they just treat it as part of parent when the formula crunches the numbers for EFC which is much more favorable since parents get a savings allowance (so it might not count at all) and if a portion does count it is assessed at a lower rate. I hope that makes sense.
Instead of keeping her savings in her name until it won’t effect her older sister’s EFC and then giving it to a parent by transferring it a parent’s 529 account, why doesn’t she just open her own (student-owned) 529 now so that she can better take advantage of the tax-free growth offered by a 529? If the money will end up in a 529 anyway, it’s better to do it earlier instead of later, and a student-owned 529 receives the same favorable FAFSA treatment that a parent-owned 529 account gets (counts as a parent asset). In my opinion, this is a much better option than appropriating your younger daughter’s money and forever taking it out of her control.
Wouldn’t the best bet be for your younger daughter to put her earnings in a Roth IRA which isn’t counted on the FAFSA? Earnings will be tax free and she can withdraw the principal after 5 years (so if set up with 2018 earnings it would be available Jan 1, 2023). With the FAFSA done on prior, prior year earnings (i.e. a 2023 withdrawal only affects the 2025-26 school year), you can time the withdrawal so the untaxed income has no effect on her contribution.
Exactly (cross posted). Also, the FAFSA treatment of a student-owned 529 account as a parent asset began years ago; it isn’t based on a change made last year.
Investments also include qualified educational benefits or education savings accounts (e.g., Coverdell savings accounts, 529 college savings plans and the refund value of 529 prepaid tuition plans). For a student who does not report parental information, the accounts owned by the student (and/or the student’s spouse) are reported as student investments in question 42. For a student who must report parental information, the accounts are reported as parental investments in question 91, including all accounts owned by the student and all accounts owned by the parents for any member of the household.
Wouldn’t the students yearly Roth contributions also be limited to their earned income? For example, if savings is from gifts and there isn’t any earned income then they can’t contribute to a Roth.
How much money are we talking here? I know every penny counts…but if it’s not a huge amount…will this even affect financial aid?
Sometimes families go through a ton of financial gymnastics for no real financial aid gain.
If your kid has $2000 in her own savings account…the FAFSA will use 20% of that in its EFC calculation…$400. Unless this will put your kid over the amount to get some grant or something…I’m not sure it’s worth all of this money moving around.
Our kids earned spending money for college. It was held in their accounts…and not 529 accounts. That way, they didn’t have to worry about what the money was spent on…they could just…spend it. It could be pizza, or concert tickets, or whatever.
Thank you for all the great responses! @BelknapPoint
This is great advice.
Just to clarify, if the funds are in a 529 account owned by our youngest daughter, they would be considered a parental asset on the FAFSA for our youngest daughter but not on the FAFSA for our oldest daughter?
“The younger daughter’s Roth IRA earnings used for qualified education expenses may avoid the 10% additional tax, but they will not be tax free.”
Indeed. And yes I’m assuming this is earned income. But if you only withdraw the contributions then those will be tax free after 5 years. And putting the money in a 529 (counted at a 5.6% rate) will reduce the financial aid which the IRA will not.
Of course if we’re only talking about $5000 this is all pretty minimal amounts, whether it’s the IRA earnings (say $1000, so tax is maybe $300-$400 if you do withdraw them) or 529 aid reduction (with the same $1000 of earnings that’s $340 per year until it’s used up). But it’s roughly a wash unless the kid gets a scholarship in which case having the money in a Roth IRA is certainly better if you don’t then need to withdraw it.
@thumper1
Yes, we will have to consider if it is worth the “financial gymnastics”, and some of it will be hers to use as spending money, so not all will go into a 529.
I believe I have seen in the past that child owned 529s are listed as an asset of the child for the CSS Profile but many CSS Profile schools do consider it a parent asset. There is no mention here of CSS Profile schools, but thought I’d mention that just in case.
privateID has it right; student-owned 529 accounts are reported on Profile as a student asset, but as long as the asset is identified as a 529, Profile schools may factor it as a parent asset (just like FAFSA), depending on each school’s specific policy. Applicants/parents may want to ask the financial aid office at target Profile schools what the school’s policy is.