If the parent is the owner of the 529, it is assessed as a parental asset (5.6%). If the grandparents pay the tuition bill, it is assessed as the child’s funds (20%).
Let’s say a 100K 529 plan is held by the grandparent
First year, no impact on EFC, pay out 20K
Second year, 20% of 20K is 4K impact on EFC
Let’s say a 100K 529 plan is held by the parent
First year 5.64% impact, or 5,640 impact on EFC, pay out 20K, 80K remains
Second year, 5.64% impact, or 4512
And so on.
Not much difference.
^ the difference is 5640 (from first year) + 512 (or 4512 - 4000).
To many of us, $6,152 means much more than others.
Why would this make more sense? Money invested in a 529 grows tax free if used for qualified education expenses. If the grandparents were saving for a grandchild’s education in a regular investment account, they could be paying substantial taxes on any earnings, depending on investment performance and the grandparent’s tax bracket.
Also, a grandparent that owns a 529 can have a distribution go directly to the school, pretty much the same as writing a check to the school.
Money that comes form a 529 to pay QEE has nothing to do with gift taxes, and is in no way limited by the annual $14k gift tax exclusion. Note that there is no such thing as a $14k per year per person gift “ceiling.” Any person can give as much as they want at any time to any other person. Gifts from any one person to any other person in excess of $14k per year will result in a reduction of the gift giver’s lifetime estate tax exemption, which for 2016 is $5.45 million. So the gift giver would have to give a lot of gifts in excess of $14k and/or die with a large estate before any tax is actually owed.
If the children do not earn money, this would be my advice:
Freshman Fall semester : Withdraw 7K to the kid (there are some allowances in which approximately 7K does not affect FAFSA EFC) meaning the 20% does not kick in yet. (Although CSS might take it into effect)
Freshman Spring semester : Withdraw 7K to the kid (there are some allowances in which approximately 7K does not affect FAFSA EFC)
Sophomore Fall semester : no withdrawals as allowances already used up for the tax year.
Sophomore Spring semester and going forward, withdraw as much as you wish. As it wont be reported on future financial aid forms as long as graduates in 4 years.
Keep it all in Grandparents 529 plan. I am not sure how you need to report what is in it on the CSS Profile as an asset, as maybe they(the grandparents) do not wish to disclose such information to you.