If Grandpa (or Grandma) set up a 529 Fund for your kids, you’re pretty lucky. If you’ve set one up for your Grandkids, you’re doing a nice thing. But you want to be careful on how you use the funds or you could severely limit the amount of financial aid for which your child or grandchild qualifies (although if you’re an active or retired senior military officer, you might not get much anyway). It has to do with how 529 assets are counted when filling out the FAFSA.
How Are 529 Funds Counted on the FAFSA?
If you or your child own the 529 plan, it is considered a parental asset and will be counted as such. The first $20,000 or so (depending on the parent’s age) of parental assets is “protected”. The amount above that threshold reduces needs-based financial aid by 5.64%. If your countable assets exceed the threshold by $20,000 your financial aid will be reduced by $1,128. Note that this does not count in the case of 529 accounts set up as an UTMA/UGMA. For these types of accounts the assets count as a student asset and reduces financial aid by 20%. A 529 plan owned by a grandparent isn’t include on the FAFSA, but that doesn’t mean it doesn’t count.
Since 529 plans owned by parents, children or UTMA/UGMAs are counted as an asset the income from them isn’t listed when completing the FAFSA. That isn’t the case for Grandpa’s 529 plan. Since the asset isn’t listed, the income from the 529 is included on the FAFSA and 50% of that income will be counted against financial aid.
There is a Loophole
When you complete the FAFSA, you report your income based on your year prior-prior (two years) tax return. This changed a few years back. So, if Junior is going to complete college in 4 years and you wait until the second semester (assuming it’s paid after January 1st) of his Sophomore year, the income will never be reported on any FAFSA.
If you’re wrapping up a long military career, you’re no dummy. You can probably figure this out yourself. While this particular issue isn’t that different for military versus civilians, that isn’t always the case. Add in GI Bill and the calculation changes more than a bit. If you’d like to chat about how we can help you with your finances, give us a call or set up an appointment.
If you found this article useful, you might like the following blog posts useful:
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.