As promised here is a follow up on the implications of a 529 from Parents vs the Grandparents. Most of the complexity stems from how the 529s are viewed with regards to the expected contribution calculations below.
Parent’s Assets: Reduce aid by up to 5.64%
Kiddo’s Assets: Reduce aid by up to 20%
Kiddo’s Income: Reduce aid by up to 50%
Note: I’m not really going to talk about Kiddo’s assets, but if you have opened a custodial account (usually a UGMA/UTMA) these will fall under that category.
For Parents
Pros:
- Tax free growth of assets
- As you use it, it gets used up and affects aid less (because you have less assets)
Cons:
- 529 assets are counted towards kiddo’s FAFSA calculation (part of the expected family contribution) and parent’s assets reduce financial aid by a maximum of 5.64%.
Example: A parent’s 529 valued at $10000 reduces kiddo’s financial aid by $564
For Grandparents
Pros:
- Tax free growth of assets
- Assets in the 529 are not counted towards kiddo’s FAFSA calculation
Cons:
- When kiddo takes a distribution from the Grandparent’s 529 it is considered income for the kiddo. This used to affect next year’s aid, but there seems to be a new rule where income now affects next next year’s aid (e.g. income in 2015 affects eligibility for 2017-2018 school year)
Example: Kiddo takes $10000 out of grandparent’s 529. Aid for in 2 years could be reduced by $5000
Mitigation Plans
- Communicate and plan distributions between parents and grandparents. It would be horrible to have both pull money out and there not be enough qualified expenses to cover the withdrawals.
- Grandparents can deposit in the parent’s 529 (if the plan allows) or give cash to the parents (up to the gift limit, 14k for 2017)
- Grandparents can transfer the ownership of the 529 to the parents (not all 529s allow this so check)
- Grandparents can strategically time payments for college. Due to the new rule grandparents should aim to pay for senior and junior years. Assuming graduation after senior year, the income from these years never affect financial aid.
Ultimately if kiddo doesn’t qualify for financial aid anyways then none of this matters and everyone can reap the benefits of tax free growth on assets for higher education!