<p>When I was asking about the grandparent's owned 529, swimcatmom had a great idea, She said, "I wonder if it would be possible, when it comes time to pay the bills, to roll the amount into a student or parent owned 529 account then pay from that account." Madison85 seemed to agree and wrote, "When it comes time each year for a withdrawal from the account to pay qualified education expenses, just have that withdrawal go first into the custodial parent's 529 account with son as beneficiary. THEN pay the expenses out of that account. Voila - no untaxed income to report on FAFSA."</p>
<p>So that lead me to do a storm of research and voila! It seems like this is a valid solution but it also seems too easy. You know the saying, if it looks to good to be true....But it does seem possible! Here is what I found on the IRS site: Rollovers -Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. These are not taxable distributions. </p>
<p>Doesn't this read as if there is no problem for either party to do a partial rollover? Once a calendar year is allowed according to the rules. We could do 4 partial rollovers each year.
Does anyone know why I shouldn't try to do this? Kelsmom? other "experts"? </p>
<p>If we take a partial rollover in July for $15K and use half of that for Fall school bills, the other half will be in the son's 529 to pay Jan bills. I realize that it the grandparent 529 will still have to be declared if asked on any supplemental CSS Profile but it looks as though son will be going to a UC that only deals with FAFSA. </p>
<p>(*For those of you who suggested we wait until Spring of Junior year to take any funds, we would not be able to use up all of the $60K if he only needs $17K per year. Any distributions must be used for that calendar year's expenses and could not go toward paying off any loans from the first year or two.)</p>
<p>According to an article I read, certain states have restrictions on 529 transfers. These states include Arizona, California, Delaware, Louisiana, Massachusetts, Montana, New Hampshire, and New York. In some cases, the transfer can only occur at death; one needs a court order; another has immediate tax liability.</p>
<p>The grandparent (step-mother to OP) is not a California resident…</p>
<p>Thank you, hoosiermom, for your reply. Luckily, the 529s are not in any of those states. Yes, I’m in CA but our 529 is New Mexico (CA rules too restrictive) and the grandparent 529 is MD so I haven’t found any rules or restrictions against doing the rollovers, yet… That’s why I’m asking here!</p>
<p>Any more ideas? Does anyone know who or what type of person would know the answers?
Thanks again!</p>
<p>From the standpoint of reporting on FAFSA, I would say that the rollover from the grandparents was for the specific intent of paying the student’s tuition. While it was rolled over into another 529, it was used for the student in that year. Rightfully, it should be reported as a other untaxed income or “gift” by the student, as it was a payment from the grandparents for tuition. That said, opinions on this may well vary. My view is that it was a payment toward tuition by the grandparents and really should be reported as such. Let’s say that there was a rollover while the student was a junior and senior in high school … then the parent would be reporting the value of the 529 as an asset, and this would keep the student from having to report it as untaxed income or gift money. But to do it in such a way that the money is never accounted for seems a bit gray to me. Again, though, others may disagree. I would say that even doing it the prior year would be a bit better … it would be an asset on the upcoming FAFSA, so it wouldn’t be phantom (unreported) money.</p>
<p>It seems as though if the rollover from Grandparent 529 to student 529 takes place each year in January (for one year’s worth of tuition) and the FAFSA is filed in February, then there would be no mismatch as the parent would report the student 529 balance as an asset.</p>
<p>(In Fidoprincess’ case, my understanding is that her husband is older and due to the asset protection allowance none of the entire Grandparent 529 account balance would exceed the asset protection allowance anyway if it were the student’s).</p>
<p>The truth is, everyone is on their honor to report the 529 distribution from a grandparent. Being honest is the right thing to do, of course. I would guess this satisfies the reporting requirement. I wonder if this is addressed in “Paying for College Without Going Broke?” This is a good book for finding out the best ways to legitimately reduce EFC.</p>
<p>Thank you so much, Kelsmom. I guess it bears further investigation but if we did as Madison says, it would still be reported and counted as only our parental asset instead of untaxed income for the student. I’m not sure that the grandparents would even go for it but it seems worth looking into more. I imagine the only way they would consider doing the rollovers would be if our 529 was in the same hands as theirs so I might have to roll ours over now.</p>
<p>Madison, that does seem like a better idea than trying to take it in July. I guess that would really be cheating but I’m not too thrilled with how this will play out. We are pulling all of our documents together now and going to do a “dry run” to see exactly where we stand and really pinpoint our Fafsa EFC. Since we’ve had the income change since I originally ran the numbers, it might work out better. Yes, we are OLD, 54, so our asset protection is around 51K. IF they would have been willing to put it in our or son’s name, it would mostly be sheltered with just a small amount at the 5.6%. </p>
<p>*I keep reading the 5.6% but what is the percentage when you go over the allowed asset protection?</p>
<p>One other thought is that maybe there is a more beneficial way to make the disbursements, finding the “sweet spot” between taking out more or less in certain years. It seems if we could take less in the first year, and then more each year after, it would have less effect on the FinAid. </p>
<p>*I also read somewhere that if we were going to do loans, it would be best to take them in freshman year. Is this true and what is the thinking behind it?</p>
<p>Son just got his ACT score last night and scored a 35 (well, 35.25 so .25 away from rounding up to a 36-yes he is a little bummed) so maybe some college will offer some merit aid or want him enough to make the “package” enticing? vballmom sent me the worksheets for doing the CSS Profile and we will sit down and fill that and the FAFSA in to at least, not be surprised next April!</p>
<p>Thank you all once again. I really appreciate your thoughts and help!</p>
<p>Wow! Congrats to your son on the 35!</p>
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<p>5.6% is the rate applied to all assets over the parents’ age-based asset protection allowance. You mentioned that you and your husband are 54 and have an asset protection allowance around $51K. So if you have $60K in assets, your EFC would increase by 5.6% of $9000, or $504, due to those assets. If you have $50K in assets, this would fall under the allowance and not add to your EFC at all.</p>