529 account experts wanted

[wanaberetiree]

I wonder what's the overall feeling by this group about 529 accounts for kids and grandchildren.

I hear some people say that such assets can harm chances for financial aid etc.

So any expert opinions ?

Thx

 

[TheRunningMan]

I wonder what's the overall feeling by this group about 529 accounts for kids and grandchildren.

I hear some people say that such assets can harm chances for financial aid etc.

So any expert opinions ?

Thx

...not to mention the possibility that college may become free for everyone. Then what happens to that 529 money?

 

[Kwirk]

I'm not sure about the future value of 529's (though I have some for my grand-kids) but they have significant present day value in Virginia. If you run payments for qualified expenses through a 529 they are deductible from Va state income tax. (Up to $4000/year per account if you are under 70 with carryover to future years, unlimited if over 70 yo.) That can amount to a 5.75% savings.

It appears to me that most financial aid these days consists of loans. I like to see college graduates have as few loans as possible. So, I don't worry too much about the possible effect on financial aid.

The contributions to a 529 can always be withdrawn without penalty or taxes. I'm guessing that the 10% penalty on earnings (not used for qualified expenses) will go away if college is made free but taxes on earnings will not. I also don't really expect college to be entirely free, eg room and board, books, etc.

 

[HenryD]

I found this article useful.

https://www.savingforcollege.com/article/workarounds-for-grandparent-owned-529-plans

We just filed the FAFSA for the first time for 2020 and our grandparent-owned 529 did not count against the student. A couple of smaller parent-owned ones did, but they will be exhausted in the first year.

The grandparent-owned 529 will get rolled over to the parent before any withdrawals are made, to avoid those withdrawals counting as income to the student.

 

[wanaberetiree]

I found this article useful.

https://www.savingforcollege.com/article/workarounds-for-grandparent-owned-529-plans

We just filed the FAFSA for the first time for 2020 and our grandparent-owned 529 did not count against the student. A couple of smaller parent-owned ones did, but they will be exhausted in the first year.

The grandparent-owned 529 will get rolled over to the parent before any withdrawals are made, to avoid those withdrawals counting as income to the student.

Very useful !
I check and my plan allows ownership change.

I also think that in worse case scenario I can cash out the account and pay taxes and penalties.

Thx

 

[rodi]

My dad generously started 529's for both my son's with a $10k/kid seeding. (Advantage of the boys being his only grandkids) When he died, i inherited the ownership - and we continued to add funds. It was a good way to set aside funds.

FAFSA looks at 529's as parental assets. Only a percentage of parental assets is considered available to pay for college. Kids' assets are 100% available... so the 529 is better than a savings account or brokerage account in the kids name.

As noted in another thread by SecondCor.... withdrawals for non qualified expenses are taxable on the gain portion... Since the original funding was already taxed. So if it's used for qualified it's like a roth - all of the gains are tax free. If you use it for unqualified expenses, only the gain portion is taxable.

When our accounts got close to the ballpark of our estimated need (but a little less) we stopped contributing, and instead banked the 'contributions' in a regular interest bearing money market - in OUR name. If we need it for their schooling we have it... if not, it can go to our travel funds.

We're newbies to the FAFSA paying for college thing... Older son is a freshman in college, younger son is a Jr. in HS.

 

[cbo111]

We started four 529 plans for grandkids in the past few years. We recently signed the plans over to the kids to manage, which was not too difficult. Figured it might help encourage them to contribute a bit. My cursory research indicated it was worse for us to own the plan when it comes time for means-testing for grants and scholarships. Something about it being considered family income when it is comes from grandparents. If the parents own it, the rules are a bit different, depending on your state of res.

 

[brewer12345]

I'm not sure about the future value of 529's (though I have some for my grand-kids) but they have significant present day value in Virginia. If you run payments for qualified expenses through a 529 they are deductible from Va state income tax. (Up to $4000/year per account if you are under 70 with carryover to future years, unlimited if over 70 yo.) That can amount to a 5.75% savings.

It appears to me that most financial aid these days consists of loans. I like to see college graduates have as few loans as possible. So, I don't worry too much about the possible effect on financial aid.

The contributions to a 529 can always be withdrawn without penalty or taxes. I'm guessing that the 10% penalty on earnings (not used for qualified expenses) will go away if college is made free but taxes on earnings will not. I also don't really expect college to be entirely free, eg room and board, books, etc.

In Colorado the state also allows you to take a deduction from income and get the savings on state income tax. However, if you take a non-qualified distribution from the account the state claws back the tax deduction. Not the end of the world, but worth looking to see if Virginia does the same thing.

 

[Kwirk]

Virginia does indeed have a claw back for non-qualified distributions.

The most interesting feature is that you can create/contribute today, use the contribution to pay tuition (or other qualified expense) tomorrow, and take the tax deduction. There is no minimum holding period.