My youngest son is a freshman in high school. He received a settlement when he was younger following an accident. The money is currently invested in mutual funds, but for college/financial aid purposes, should I be doing something different with the money? Thank you!
If it’s in a 529 account then it can be a parent’s asset for FAFSA and not his.
Will your son need this money for anything OTHER THAN educational purposes?
No, he doesn’t need the money for anything else. The plan is to use the money for college unless we don’t need it.
If you liquidate the current investment to invest in a custodial (UTMA) 529 account, there will be plusses and minuses.
On the plus side, in a custodial 529 account the asset will be considered a parent asset for FAFSA (government) financial aid purposes, even though your son will remain the legal owner. Right now, in a straight (non-529) UTMA account, for FAFSA purposes the asset is considered a student asset. Student assets take a bigger hit than parent assets when FAFSA calculates a family’s ability to pay for college. Schools that also use a different financial aid form, the CSS Profile, will vary on whether or not a custodial 529 account is considered a student asset or a parent asset when determining eligibility for institutional grants and scholarships. Also, 529 account earnings can be taken tax free if used for qualified education expenses (this includes room and board). Your son will be taxed on any earnings in a regular investment account.
On the minus side, 529 investments can only be made in cash, so your son may incur significant capital gains taxes if the current asset is liquidated to fund a custodial 529. You will need to look at how much unrealized gain there is, and what tax bracket your son would be in depending on how much of the asset is liquidated. There’s also the “kiddie tax” to worry about, since any realized gain would be cinsidered unearned income to your son. Also, any 529 earnings that are used for other than qualified education expenses will be taxed, and may incur a 10% penalty as well, dending on the circumstances.
Thank you, BelknapPoint!