When my child was born my father set up a college fund. He and I contributed to it through the years and it’s grown into the 130k range. That’s great, right?
Unfortunately we didn’t know what we were doing and it’s set up as a custodial account, not a 529. As I understand it, that means the kiddo gets complete control of the money on his 18th birthday. He’ll also have to pay capital gains if anything is withdrawn from it, and I suspect that the proportion of capital gains will show up as the kid’s income on taxes?
As I understand it, when calculating FAFSA, they consider 5% of my assets and 25% of my kid’s assets are available to pay each years’ costs. Our EFC without this fund taken into account comes to about $26k. With, it’s $58k
Kiddo is still 17 and a junior in high school so we have a little time.
Is there a downside to transferring some of that fund to my name or to my parents’ names before I file the FAFSA this October?
Yes; that’s called stealing, combined with fraud. It’s not your money or your parents’ money; it legally belongs to your child. You can open a custodial 529 with the money and it would then be properly reported on FAFSA as a parent asset instead of a student asset, but that would require liquidating the current investment with your child responsible for any resulting income tax because of gains realized.
I’m glad I asked, I’m not versed in this stuff. A 529 sounds like a good idea.
So if I liquidate the current investment and open a 529 with most of it, would we be able to use some of it to pay the kid’s income tax on the gains realized?
We’re in MD, the form I saw from the brokerage said it would be his at 18.