I have stock that has done really well and my daughters are 10th and 7th grades. Is there a tax advantaged way to sell the stock and put in fund for college? I do have 529 for both already.
How would this impact FAFSA (which wouldn’t be done this year)?
Whether selling would result in a capital gain or loss can matter. Obviously, a capital gain or loss during the year whose income is evaluated for financial aid can affect financial aid calculations. But a one time capital gain or loss would only affect one year of college financial aid calculations, not other years (except indirect in terms of how assets may change based on the replacement investment versus whatever was sold).
Where are you going to put these stock profits? If they are in 529 accounts or,other savings the day you file your FAFSA, they will be assets if yours.
You will have to pay taxes on the gains for these stocks in the eyar innwhich you sell them.
Remember, fafsa and Profile look at prior prior year tax return info now…if you have a tenth grade daughter, that means she will start college in 2019, somthe 2019-2020 financial,aid forms are the ines you will be completing for,her fist year. Those will use 2017 tax year information. The gains on those stocks will be reported on the 2017 tax return.
All,that aside…really…your need based aid is primarily based on your income. You could be doing all of these financial gymnastics for NO financial aid gain…at all.
In addition, the vast majority of colleges do not meet full financial need.
What are you hoping to gain by selling these stocks before you actually need to sell these stocks?
There are so many variable it is maddening to try to figure them out and predict the future.
Maybe you should have sold them last year. No matter if you keep them or sell them, you have to report their value as an asset, and assets are assessed each year. But if you sell them during one of the years used for school measurements, the proceeds also show up as income for that year - and you are assessed on income each year. Then again, maybe you should wait until junior year to sell them, and use the proceeds for senior year of your youngest child.
Additionally, different schools have different formula for determining what FA is available. For example, some schools don’t assess home equity - so a parent is better off using other assets to pay down their mortgage before applying.
Or, maybe now is the time to do that remodel of the home…
If you decide to sell them now and they drop in value by half, you’re delighted. If they double in value, you’ll regret it. So tell us what they will do.
What I am getting at is this - there are far too many unknowns now for any of us to give you really good advice for your situation - instead these are just ideas to think about.
Trying to be cute/clever on taxes and fin aid means you may be doing something stupid in terms of an investment decision. Which is far more important.
The main reason to sell the stocks is if you think they are likely to decline in value between now and when you need the money. Or if you think your overall portfolio lacks diversification. The main reason to keep the stocks is if you think they will perform OK in the next few years (which would let you delay the taxes as a bonus).
Everything else is small beer by comparison. FAFSA (as noted above) turns mostly on income. The 529s are usually treated as a parent asset for fin aid. Same as stocks you own in your name.
The present admin is only going to be tax friendly to wealthier investors, it would seem to me. I assume most people with a decent 529 and a investment portfolio won’t be in line for any FA.
Sounds like OP has an unrealized gain on a security that isn’t currently in a 529 plan. Unfortunately there is no way to realize the gain to use for education purposes and avoid recognizing the income. You can’t contribute securities to a 529 plan, a Coverdell account, or an IRA. Only cash contributions can be made. There is no exclusion of income because you want to use for higher ed purposes. Only good news is the max federal rate on capital gains is currently is 20%. You won’t pay more than this in federal tax on the gain. Plus your state tax rate. No benefit to transferring the stock to the child before selling due to the kiddie tax.
Best advice you’re getting here is that you shouldn’t try to be too cute in deciding whether to take your gains. I would regard this as an investment management decision, not a strategy for college financial aid. YOU are perhaps going to feel more comfortable taking some risk out of your portfolio now. If so, do that.
The way I looked at it was that we never knew for sure whether our kids would be offered aid based on need. So we did our best to make sure the money would be on hand in case they were NOT offered it. In the end, they were offered modest amounts of merit-based aid and we were happy to be able to let them make the final decision about which college to attend – knowing that we would be able to support them no matter which college they chose.
I will chime in to say that we recently did sell a mutual fund and put the proceeds into our son’s 529 account. He is a sophomore in college and we knew we would need that money to help pay for his final year, and in the current uncertain political/economic climate we didn’t feel we could risk a stock market crash because we wouldn’t have time to have the fund recoup its losses. So we took the profit and ran! But that was one fund, for one specific purpose, for use in a short timeframe.
All good thoughts. Figure out what the best investment decision is and do that.
If you need to diversify and reduce risk on that one stock, then do it. That’s the reason why many 529s automatically de-risk the portfolio as the college date approaches. Your risk tolerance is different if you need the money next year versus 8 years from now.
If you make charitable donations, you can donate your appreciated stock instead of cash. That way you get the tax deduction for the full appreciated value of the stock, but avoid the capital gains tax. Most charities and churches will accept shares of stock.
Thank you all - I seem to have fallen off the bandwagon here. Back on now and my stock continues to climb to the highest it’s ever been. That’s one reason I’m wondering if we should sell some - to have for whatever reason (but particularly for college, as it’s so pricey). It would have a significant gain as I bought really low. Not sure how taxes impact the FAFSA…
Might be the time to move stock (or a portion) to safer investment options.
FAFSA doesn’t care that you had a capital gain a few years ago and therefore paid taxes on the sale of a security (is that your question?) FAFSA will capture the assets you have on hand (so if the cash goes from a security into your mutual fund account- it’s still an asset) and your income based on the year you file.
If you are uncomfortable knowing that the value of the stock could fall (which of course it can- at any time) and need more diversification, then selling (even with the long term capital gain) might be the right answer.
This is completely independent of financial aid. Don’t rebalance your portfolio based on financial aid. You could get shafted twice- once, because you don’t qualify for the aid you thought you might (the formulas are not set in stone forever and ever) and secondly because you made a bad financial decision.
Be smart about your overall risk position. That’s never a bad call.
And remember- your income may be too much by the 7th grader is ready for college and you won’t get ANY aid, regardless of where you stick the assets.
“my stock continues to climb to the highest it’s ever been.”
I think that the biggest issue here, as mentioned by others, is the risk inherent in the stock market. Clearly the market has had a great run up over the past few years. I don’t think that anyone knows how long this run up will continue.
There is an issue that if you sell it then it will show up in your 2017 income, and the proceeds will also show up as an asset (whether in a 529 or elsewhere). As far as I can tell there is a double counting here which also impacts people who own small businesses or farms or small amounts of rental property. However, my guess is that the very significant risk of this impacting your child’s financial aid is probably less relevant than the risk inherent in owning stock.
As blossom points out above, you need to look at how this investment fits in your overall financial planning. College is just one factor. Is your home paid off? Are your retirement accounts maxed out? What is the state of your various 529s?
Don’t twist yourself all in a bunch trying to maximize future financial aid awards. Most places don’t have all that much money of their own to shell out anyway. Run the Net Price Calculators at the websites of a couple of your own home-state public Us and your alma mater(s), and see what you’d be expected to cough up if your kid were attending next fall. You also can print out the current FAFSA formula and run it with several different scenarios: https://ifap.ed.gov/efcformulaguide/attachments/071017EFCFormulaGuide1819.pdf
Our financial planner has been warning of a market correction for the past year now. So far, it hasn’t happened, but of course, it will. The question for the OP is really whether to try to eke some more value out of the stock, or to risk selling while it still has a chance of increasing its value, or to wait and possibly sustain a loss in value. If any of us really knew what the market would do, we’d all be a lot richer!
Thank you. Good to hear / be reminded that the income impact from selling would only be for the 1st year. Of course, any residual profits would go to assets.
At this point, I’ve held the stock for 15+ years and since it’s so high, feel that it would be a good amount of change to be able to use for college. At this point, we do not have enough funds to cover college for 2 kids in the upcoming years, even though we have $ in several 529 plans. So, we are looking for options for funding it. Would probably rather tap some of the profits we would realize with stock. Other options are tapping home equity or other financial aid options if they become available (scholarships, grants, etc.) - with the thinking that these would probably be merit-based, not need-based.
Pay attention to your overall financial well being. Is it time to sell the stock while it is high and invest in a safer product? Discuss with your financial advisor. The reason you have stocks or any other investments is to have money for the future. I would never take on debt when I had the nonretirement reserves on hand (you preserve your retirement funds because you can pay off loans but never replace the removal of those funds).
Your question should be- should I sell a stock and reinvest proceeds in a safer product to insure having the money when I need it for college expenses? That is for the experts to advise you. See post #16.
A good rule is to never try to game the system. That can backfire.
I would run the NPC with and without the capital gains generated by asset sale (and the same assets). It will count as income, which has a higher percentage of parental contribution The downside is that if you sell the stocks just prior to or during the time you child is in college, except late junior/senior year, it will affect your FA. Once you determine the affect on your EFC, you can make an informed decision as to timing.