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.
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