I have two kids, both over the age of 18 but both dependent students for financial aid purposes. They are both receiving need-based aid from CSS Profile schools. I am the owner of a 529 plan for each, as well as a Coverdell ESA plan for each.
Right now, all plans are being reported as parent assets to both colleges.
Is it possible to transfer ownership of either/both the 529 and/or Coverdell to the students themselves?
If so, does that shield each student’s assets from assessment by their sibling’s financial aid assessment?
And…if this is possible, is that money still assessed at the parent’s lower rate (since the students are dependent students) or does it jump to the student’s higher rate?
And…does that differ based on whether it is the 529 or Coverdell ESA?
I’m assuming none of this is possible, but just wanted to check.
But…I believe you need to look at the provisions of your plan. Remember…if you transfer ownership to your kids…they will be able to do whatever they please with that money…because it will become theirs.
And I have no worries on their spending it on anything but college, so that’s not a problem, although I can see how it is definitely something to know and consider!
Student assets are assessed at a higher rate than parent assets (20% vs. 5.64% iirc) on financial aid forms, so I’m not sure what the advantage of placing the assets into the student’s name would be.
ETA: It looks like student 529s are still considered parental assets and assessed as parental assets
I can answer questions relating to the 529 accounts. I don’t have the experience or knowledge to feel comfortable addressing the questions in regard to Coverdell accounts.
Generally, yes, but some 529 plans restrict the transfer of ownership. You will need to check with the plan administrator/s for the rules that apply to your plan/s.
Yes, a 529 account owned by the student will only affect that student’s need-based aid calculation.
For FAFSA purposes, a student-owned 529 account will still be reported and assessed as a parent asset. For Profile purposes (which is what will matter most for your kids), each school has its own particular policy on how student-owned 529 accounts will be treated. Some schools follow the FAFSA methodology, and some consider a student-owned 529 to be a student asset when determining need-based aid. You should contact each school’s financial aid office to ask what the school’s policy is.
Yes, my understanding is that you can do a Coverdell to 529 rollover on a tax-free basis. If you do this and there is a choice, I recommend that you do it as a trustee-to-trustee transfer instead of having the transferred funds go through you, as the second option can get messy, especially if the IRS rules aren’t followed or time limits are missed.
I have Coverdell and 529 plans for my kids. I have done roll-overs from the Coverdell into the 529. When I did that, it was important to specify the cost basis just in case you don’t end up using it all up via qualified withdrawals. This was into NYs 529 plan. I will add, doing so also qualified me for a state tax deduction on the amount rolled over. A few years ago, I was talking to a rep on the phone and was told if I simply withdraw the money from Coverdell and then within two months contribute it to the 529, the cost basis will get reset. This really did not make sense to me, but I called and was told the same thing from a second rep. The 529 does not really know where the money came from. As far as they are concerned, it’s a new deposit. When I do my taxes, in Turbotax, I indicate that my withdrawal from the Coverdell was contributed to a 529 and Turbotax, therefore, does not treat it as a taxable event. I am still leery, but that is what I was told. But, I do plan to use it all for qualified withdrawals, so the cost basis really doesn’t matter to me as far as I’m concerned.