Non-Custodial Parent's 529 Plan

Paying for College
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<p>My oldest kid is now a freshman in college, and the school didn't "see" my 529 plan on the FAFSA from last year, because it's not the custodial parent's asset. So far so good, but now that the 529 has actually been used, the disbursement is reportable as untaxed income to my kid on this year's FAFSA. That's much worse than if the 529 plan could be reported as a parental asset (and I'm still his Dad). A student's untaxed income is assessed much higher than a parent's asset. In my opinion, that's a perverse outcome. </p>

<p>Mom probably has to file a revised FAFSA, but at least we'll be in compliance.</p>

<p>A lot of people seem to know that only custodial parents have to report 529 plans as assets on FAFSA. I don't think the untaxed-income aspect is widely known, and hopefully this post will help others plan ahead. The same thing would happen with 529 plans owned by a grandparent or another relative. We could have made different ownership arrangments at the time of divorce, but now it's probably too late.</p>

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<p>This is a good point to highlight. I’ll include the link to a previous discussion for completeness:</p>

<p><a href=“http://talk.collegeconfidential.com/financial-aid-scholarships/853123-fafsa-529-plan-account-owner.html[/url]”>http://talk.collegeconfidential.com/financial-aid-scholarships/853123-fafsa-529-plan-account-owner.html&lt;/a&gt;&lt;/p&gt;

<p>By the way, the student income allowance is around $5000, so if “other support” is less than that then it won’t affect the FAFSA EFC.</p>

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<p>I don’t think I understand. Mom is the custodial parent, right? And FAFSA doesn’t care about non-custodial parent’s income/assets. So, how does she plan on reporting this?</p>

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<p>@arutha - it’s actually the student, my son, who should report it as untaxed income on line 44j of the FAFSA. I said Mom because she’s the one who physically submitted it, but I think they are both responsible for the information on it.</p>

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<p>Okay. But that would be in next year’s FAFSA, not a revision of this year’s FAFSA. right? I got the impression that mom will have to file a revised FAFSA this year which includes your 529. Now it is clear.</p>

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<p>So, if the non-custodial parent helps the student with his tuition, is that considered untaxed income for the student as well?</p>

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<p>Yes, if NCP (or anyone other than custodial parent) helps with cash that’s also untaxed income for the student. I did both during 2010, 529 and cash. He has to report the total. </p>

<p>Yes, it has to be reported on a revision of the FAFSA they recently filed in preparation for the 2011-12 school year, because it covers 2010 income.</p>

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<p>hmm Whydoicare, 529 rules may have changes, but I thought for a long time any help from anyone other than custodial parents has to be reported as student income.</p>

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<p>Query: if whydoicare took a distribution from his 529 account for his son’s freshman year tuition in his own name and then gave that same amount to the custodial parent, and the custodial parent paid the tuition bill, would that change things???</p>

<p>I face a tuition bill and can do one of three things - have the 529 issue a check directly to the college, or to me or to my student. I am wondering if any move makes a difference.</p>

<p>I am wondering particularly if a distribution to me, with me then paying the custodial parent (call it a gift for the son’s educational purposes so it meets the 529 accountability guidelines - right?), and then having the custodial parent write the tuition check will reclassify the proceeds as if they were the custodial’s parents untaxed cash - and accounted at the more favorable 5.64% parental rate, than the less favorable untaxed cash to student rate of 20%, which I think is the differential here, no? </p>

<p>I’m a rookie college parent, this is my first kiddo heading off to college and my first tuition payment out of the 529, and as a non-custodial parent I’m trying to learn to play the game within the rules, but take advantage of all the rules will give me…</p>

<p>Please advise, post haste, if this is a solution or not? if not, why not? thx, DSOW :)</p>

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<p>You’re confusing assets with income; assets are counted at the rate of 5.6% (parent) or 20% (student) when reported on FAFSA. Student income after $5250 counts at the rate of 50%, while parent income after a variety of allowances counts at a marginal rate of 47%. Student untaxed income is reported on FAFSA as income in the year received and is subject to the 50% rate.</p>

<p>So if I understand your question, you’re the non-custodial parent with a 529. You can withdraw funds from the 529, and your question is where should the money go so that it does the least amount of harm to the student’s EFC. If it goes to the college then it’s clearly a qualified higher education expense (ie no penalty for withdrawal), and is reported on the following year’s FAFSA as student untaxed income. If it goes to you, then the custodial parent or the student who turns around and uses it for qualified higher education expenses, the line isn’t quite so direct but should still fall within the 529 rules. In this case it seems that it’s still student untaxed income, since the student is the beneficiary.</p>

<p>If the amount is less than or equal to the student income protection allowance ($5250), probably better to just pay the school directly to avoid all question of whether it’s a qualified distribution. I don’t think there’s any way around having it reported as student untaxed income.</p>

<p>Grandparents who own 529s probably face the same dilemma.</p>

<p>[FinAid</a> | Saving for College | Section 529 College Savings Plan Loophole](<a href=“Your Guide for College Financial Aid - Finaid”>Your Guide for College Financial Aid - Finaid)</p>

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<p>@DownSouthOutWest and @arutha - I’m sorry, should have updated this thread since April 8. Mom checked with the school’s financial aid officer back in April, and they did NOT want my 529 disbursements reported anywhere on FAFSA. This is counter to many of the responses posted on CC, however, it made sense to me on top of being an official response from the school. Mom did not report it. I would suggest calling your kid’s financial aid officer, or have the custodial parent do it, and see what they want you to do.</p>

<p>Most of this thread was posted on a single day, and I was unnecessarily “worked up” over stuff I had seen on this board.</p>

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<p>That’s very interesting, Whydoicare. We have a financial aid officer here on this board who has linked us directly to the FAFSA instructions that tells you where to list 529 disbursements from non-custodial-parent-owned 529s. I’ve seen it myself right there in the published instructions.</p>

<p>It’s very confusing when you get different answers from different people! But glad you got an answer that works for you and for your school’s financial aid office. Thanks for the update.</p>

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<p>I read all that stuff, too. It was actually my ex-wife who got the answer she wanted, from a real-life financial aid officer, even after I had told her that she could get the word from sarcastic know-it-alls with thousands of posts on this board. Go figure. Bottom line, the FAFSA is not NCP’s responsibility.</p>

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<p>On a different site, Kantrowitz suggests a non-taxable rollover into a new 529 plan with CP as the owner. If you trust the CP enough, and your state/plan allows it, that would be the bullet-proof way of ensuring most favorable treatment of the funds.</p>

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<p>WhydoIcare, I don’t think anyone here is a “sarcastic know-it-all”, people are actually very helpful. And it’s completely true that there is contradictory information available… not from people here, but even in the FAFSA instructions as published by the dept. of ed.</p>

<p>So, I find your experience very interesting as another indicator of the confusion around this issue, but I think you’re being unfair with regard to people here who are sharing their own experiences.</p>

<p>Also, I don’t think anyone ever said the FAFSA was the “NCP’s responsibility”. The issue is only the instructions for how students report (or not) certain things.</p>

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<p>Thanks for the assistance. Let me see if I follow my options, given that the tuition bill is due, and right now I’m the owner/custodian of the 529 Account.</p>

<p>By the way, my student is working this summer (yeah! - as getting a paying job this summer was tough for an 18 year-old given the economy) and will have probably make $2000K. The tuition bill however is $9500. So he’ll be over the $5250. Assuming the above numbers, he’ll exceed that by $6250 if the $9500 is income to him for 2011 for purposes of his 2012 FAFSA.</p>

<p>If the 529 pays the school, me or the student, it’s student money received.
If the 529 pays me, and I transfer the money to the custodian parent (assign the check), that apparently does not change things - it remains the student’s income/money received?</p>

<p>Also, we can contact the school and ask how the school would want us to report the use of NCP (or third party) 529 Account proceeds, and hope for a favorable ruling that it need not be reported on either the FAFSA or the CSS Profile (my student’s school requires the CSS Profile from only the Custodial Parent).</p>

<p>Going forward, I should consider assigning the 529 to the custodial parent or the dependent student. If assigned to either, then the account balance will have to be reported as the custodial parent’s assets on the FAFSA in future years, but then disbursements for the tuition in future years will not be income/money received to the student.</p>

<p>Query — if I assigned the account today in July 2011 before paying the tuition, but of course well after the 2011 FAFSA has been submitted and financial aid package awarded — what consequences for the 2011 reporting year? Would the student have an obligation at this point to update the 2011 FAFSA, which was accurate when submitted? Would an amended 2011 FAFSA need be filed? If not, then I could assign immediately, and the account balance would be reported as the custodial parent’s on the student’s 2012 FAFSA. Is that not the very best solution, assuming there is no obligation to update the 2011 FAFSA, etc.?</p>

<p>Am I missing other beneficial options.</p>

<p>Thanks, DSOW…</p>

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<p>Parent assets are supposed to be reported as-of the day of the first FAFSA filing, so, no, I don’t think there would be any obligation for the custodial parent to report that asset with a corrected FAFSA for this 2011-12 academic year.</p>

<p>The CSS Profile definitely requires reporting of any 529 or outside asset held by anyone for benefit of the student. There is, however, no universal formula for dealing with that asset – that is to say, some colleges might consider it 100% available from year 1, some will divide the balance over 4 years or 6 years and consider a portion available each year. Unlike the FAFSA which has an established formula for generating an EFC, the Profile merely collects information and how that information is treated with regard to financial aid will vary from one college to the next.</p>

<p>My son has a friend who had such an asset and Northwestern U. (a Profile college) divided it by six and determined that 1/6 was available each year for the student.</p>

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<p>I just read the above exchanges and am still confused as to how they apply to my situation. I am the grandparent of a 6-year old and want to assist him attending a good college. </p>

<p>I read an Wall Street Journal article recently which said that non-custodial relations of a grandchild should not contribute to their own 529 plan but (assuming one has trust in his parents which I absolutely do) contribute to custodial parents’ 529s since the amount of financial aid would only be reduced by 5.6 percent or so. I contacted a college financial aid office (Carleton College) and they said this WSJ article was wrong because Carleton would not even know about the 529s. However, reading the above exchanges, it seems like Carleton would know once the student has enrolled and used 529 moneys. So, the question remains for me, is it better to contribute to a 529 that my son owns for my grandson or does it not make any difference at all? </p>

<p>Grandpaof6year</p>

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<p>

See
[Pros</a> and Cons of 529s for Grandparents](<a href=“Grandparents Faqs on 529s - College Savings for Grandchildren”>Grandparents Faqs on 529s - College Savings for Grandchildren)</p>

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<p>There is a question (SR-165A) on the Profile that asks the student to “enter the total amount you expect to receive from your relatives and all other sources.” It doesn’t mention 529s specifically, but if your grandchild were to answer that honestly with the amount he/she expected to receive each year from the 529, then Carleton may not know that money is coming from a 529, but they would know about the money. My son’s college also has their own form (in addition to the CSS Profile) that does specifically ask about non-student-or-parent-owned 529s. I think your best bet would be to contribute to a 529 account owned by the parents – but of course by the time your grandchild is entering college the rules may well have changed. I think these accounts are still a bit of an unresolved issue with regard to college financial aid.</p>