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Non custodial parent and 529

guacodansguacodans 1 replies1 threads New Member
I am the non-custodial father of my daughter who will be starting college in Fall 2020 . I have a 529 plan with her as the beneficiary and me as the owner. I have a separate 529 plan for my son who is in middle school (similar beneficiary/owner setup)

Relationship with the mom is terse/difficult.

Daughter has got 10K/yr in scholarships in a Univ. Tution & Living is 20K/year. So out of pocket will be approx 10K/year.

In order to minimize taxes/penalties, as well as give her favorable FAFSA treatment next year, I've come up with the following strategy to fund her shortfall and perform a penalty-free withdrawal of the 10K (scholarship)

a. Move all but 20K from her 529 to my son's 529

b. Change her 529, so that she becomes the owner and I remain as custodian

c. Direct the plan to send 10K directly to her school from her 529. This will cover her 10K annual shortfall at school. Since she is the account owner, this should not have an adverse effect on next year's FAFSA.

d. Show the scholarship letters to the plan and transfer 10K to a bank account where she and I are joint owners (pay income tax on the earnings)

e. Transfer the same 10K from the joint bank account to my personal account.

f. Next year, after the rolling 12 month window ends, move 10K from my sons 529 to her 529 and repeat step c.

Any pitfalls with the above? Is there another option/strategy that could work as well.
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Replies to: Non custodial parent and 529

  • thumper1thumper1 76073 replies3352 threads Senior Member
    @BelknapPoint would any of these “strategies” be allowed?

    To @guacodans lots of gymnastics here that might not net your daughter a dime of additional need based aid if that is your goal.

    It sounds like this is a college that uses only the FAFSA to determine awarding of need based aid. Right? That being the case, your daughter’s custodial parent income and any child or spousal support you pay will be the driving forces in determining the FAFSA EFC...and your wife’s and daughter’s assets.

    It sounds like you want to direct $10,000 a year towards college costs. It’s wonderful that you can do this...so just do it. You can’t hide the money in someone else’s account if it’s really YOUR money. If that is your intended goal...it’s just not possible.

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  • cshell2cshell2 818 replies10 threads Member
    Withdrawals from non-custodial IRAs don't affect the student's financial aid at all after Jan 1st of their Sophomore year (assuming they are done in 4 years), so I might just try to figure out another strategy for getting her the extra money she needs those first 3 semesters. But, I'm a big fan of keeping things simple.
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  • cshell2cshell2 818 replies10 threads Member
    edited January 11
    thumper1 wrote:
    It sounds like this is a college that uses only the FAFSA to determine awarding of need based aid. Right? That being the case, your daughter’s custodial parent income and any child or spousal support you pay will be the driving forces in determining the FAFSA EFC...and your wife’s and daughter’s assets.

    I think he's trying to avoid the big hit to FAFSA on non-custodial withdrawals. Anything his daughter receives from that 529 as is is assessed as student income (50%) the following year.
    edited January 11
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  • twoinanddonetwoinanddone 23648 replies17 threads Senior Member
    If your daughter has $10k in a FAFSA that she owns, that must be reported on her FAFSA but as a parent asset (her mother, if that is the FAFSA parent). If her mother has other assets or a high enough income, your daughter may not get need based FA anyway. Did she get any need based FA this year (when the 529 money wasn't even reported on the FAFSA because you are the owner)? If not, it's unlikely she'd get any next year.

    What are you trying to accomplish?
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  • thumper1thumper1 76073 replies3352 threads Senior Member
    If your daughter has $10k in a FAFSA that she owns, that must be reported on her FAFSA but as a parent asset (her mother, if that is the FAFSA parent)

    @twoinanddone I think you mean $10k in a 529, Not in a FAFSA...right?

    Hoping someone can clarify @kelsmom maybe. For married folks with 529 accounts held for siblings, ALL of those accounts must be reported on all FAFSA forms. So transferring into a parent owned account that has the son as beneficiary would still be listed on the daughter’s financial aid forms.

    Is this the same for non-custodial parents... @kelsmom?
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  • thumper1thumper1 76073 replies3352 threads Senior Member
    Withdrawals from non-custodial IRAs don't affect the student's financial aid at all after Jan 1st of their Sophomore year (assuming they are done in 4 years

    @cshell2 I think you mean 529, not IRA, right?

    If this is the case, why doesn’t this parent just wait until after Jan 1 of the kid’s sophomore year in college (make sure the FAFSA is completed)?
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  • twoinanddonetwoinanddone 23648 replies17 threads Senior Member
    Yes, I meant $10k in a student owned 529.

    But I don't see where this student is getting need based FA. COA is $20k, scholarship is $10k, $10k is coming from the 529. How is reducing the student's income going to help?
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  • cshell2cshell2 818 replies10 threads Member
    edited January 11
    thumper1 wrote:

    @cshell2 I think you mean 529, not IRA, right?

    Whoops. Yes. I have IRAs on the brain right now.

    Non-custodial 529s do not have to be reported at all until they're withdrawn and gifted to the student and the sibling 529 is not counted as an asset either.

    All this is for FAFSA only not CSS profile.

    edited January 11
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  • cshell2cshell2 818 replies10 threads Member
    I agree with @twoinanddone. If there is no need-based aid on this year's financial aid, it's kind of pointless to go through any of this. Is the scholarship merit only or is there a need-based component?
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  • thumper1thumper1 76073 replies3352 threads Senior Member
    It sounds like maybe this parent is trying to leverage for AOTC perhaps. If that is the case, he needs to see what the scholarship actually covers.

    If the non-custodial parent is trying to leverage for additional need based aid...this might be a futile effort. A school with a total cost of attendance of $20,000 is not one that meets full need for all accepted students. That being the case, all this shuffling of money and accounts might not net one nickel more in need based aid.

    If the student is Pell Grant eligible based on the custodial parent FAFSA, then the easiest way to not have the non-custodial parent contributions added in would be to wait until after the FAFSA is filed for this kid’s junior year of college. I think.

    Is the student Pell eligible?

    I’m still not really clear what the OP hopes to accomplish.
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  • BelknapPointBelknapPoint 4693 replies17 threads Senior Member
    a. Move all but 20K from her 529 to my son's 529

    b. Change her 529, so that she becomes the owner and I remain as custodian

    All the money in the 529 account when your daughter becomes the owner can now only be used for her benefit; no taking anything back for someone else to have or use. And when she reaches the age of majority under state law, she is entitled to have full control of the account (i.e. you no longer act as custodian and turn over control to your daughter).

    c. Direct the plan to send 10K directly to her school from her 529. This will cover her 10K annual shortfall at school. Since she is the account owner, this should not have an adverse effect on next year's FAFSA.

    Well, the assets in the 529 account will need to be reported on financial aid forms. Whether or not this has an adverse impact on next year's FAFSA depends on a combination of things.

    d. Show the scholarship letters to the plan and transfer 10K to a bank account where she and I are joint owners (pay income tax on the earnings)

    The 529 plan administrators don't care about any scholarship, so there's no reason to show them scholarship letters; the IRS is a different matter. Also, the earnings portion of the non-qualified distribution will be taxable to your daughter.

    e. Transfer the same 10K from the joint bank account to my personal account.

    I would consider this to be improper, if not illegal, because it's not your money anymore. At the very least, it would be hiding an asset belonging to your daughter that would need to be reported on financial aid forms.

    f. Next year, after the rolling 12 month window ends, move 10K from my sons 529 to her 529 and repeat step c.

    Again, this would be an irrevocable gift to your daughter.

    Any pitfalls with the above?

    Only a few that I can think of.
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  • RichInPittRichInPitt 1612 replies25 threads Senior Member

    I would consider this to be improper, if not illegal, because it's not your money anymore. At the very least, it would be hiding an asset belonging to your daughter that would need to be reported on financial aid forms.

    Isn’t the child entitled to gifts up to the amount of the annual limit, which is over 10K?
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  • guacodansguacodans 1 replies1 threads New Member
    Am doing all the above since the mom is a mess and would squander away any money she can get her hands on; while I still want the 529 to
    be designated as my daughters - so that any withdrawal from this 529 is not treated as contributions from a non-custodial parents's 529.
    So, am essentially trying to "meter" funds into the newly transferred 529 so that it meets the need for her current school year, while
    keeping her mom's hand away from the rest of the funds by retaining it in the 529 of my son.

    I forgot to mention that the scholarship is merit based and is approx equal to her "Need" computed from this years FAFSA.
    The 529s are currently owned by me and did not factor into the current FAFSA

    I'm also trying to avoid a scenario where next year she does not maintain the eligibility for the merit based scholarships (e.g. minimum grades).
    In such a scenario, the Need would be fulfilled by need based scholarships and so want to make sure this years 529 withdrawal does not
    adversely affect her next year.


    From:

    https://www.savingforcollege.com/article/divorce-can-derail-college-savings
    "
    However, any 529 plans that are owned by the noncustodial parent are not reported as assets and any distributions count as
    untaxed income to the beneficiary. This is the same treatment as for grandparent-owned 529 plans.
    The noncustodial parent is not considered a parent for federal student aid purposes.

    This can have a big impact on eligibility for need-based financial aid.
    Parent assets reduce aid eligibility by at most 5.64% of the asset value.
    If a 529 plan is not reported as an asset on the FAFSA, distributions count as untaxed income to the student,
    reducing aid eligibility by as much as half of the distribution amount.
    Thus, $10,000 as a parent asset reduces aid by up to $564, while $10,000 as a noncustodial parent asset
    reduces aid by as much as $5,000.

    Since the noncustodial parent is not considered a parent for federal student aid purposes,
    gifts from the noncustodial parent to the student count as untaxed income to the student if they are outside the
    requirements of a child support agreement.
    "



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  • thumper1thumper1 76073 replies3352 threads Senior Member
    edited January 11
    I understand what you want to do. I’m not sure why you think your former wife can get her hands on monies in an account owned by you.

    You absolutely can pay the college directly out of these funds. Contact your 529 administrators to find out what to do.

    Re: merit aid...our kids didn’t get a dime of need based aid but they did get merit aid. Both attended very extensive colleges. We made it very clear that they had to meet the school bar for keeping that merit aid or they would be heading home.
    I'm also trying to avoid a scenario where next year she does not maintain the eligibility for the merit based scholarships (e.g. minimum grades).
    In such a scenario, the Need would be fulfilled by need based scholarships and so want to make sure this years 529 withdrawal does not
    adversely affect her next year.

    Your child’s college doesn’t meet full need for all accepted students, right (no school that costs $20,000 a year does). That being the case, there is NO guarantee the school will give your kid $10,000 in additional need based aid if she loses her merit aid...at all.

    Wouldn’t it be smarter to set an academic bar that meets the criteria to keep merit aid? What GPA does the school require? I’d expect my kid to keep that merit award...which she wouldn’t have gotten without having demonstrated the ability to achieve.

    My opinion.
    edited January 11
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  • BelknapPointBelknapPoint 4693 replies17 threads Senior Member
    Isn’t the child entitled to gifts up to the amount of the annual limit, which is over 10K?

    Huh? Maybe I'm being slow today, but I'm not sure what you're getting at. OP is talking about taking money that, under his scenario, legally belongs to his daughter, and placing it in a bank account to which his daughter has no legal access or right. Even if this was legally appropriate (I don't think it is), the money would still need to be reported on the daughter's financial aid forms as her asset.
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  • mommdcmommdc 11652 replies31 threads Senior Member
    Isn't money the non-custodial parent gives to D for education untaxed income to her in the year received?

    So if she receives this $10k in 2020, assuming $5k in August and $5k in December, then that would be untaxed income for the 2022/23 FAFSA, right?

    There should still be an income protection allowance for her around $6,800 (this might be higher by then), before any of it counts towards the FAFSA EFC.

    @kelsmom is that correct?

    Does the D have a $0 FAFSA EFC? Does auto zero apply? Then her income won't be considered.

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  • cshell2cshell2 818 replies10 threads Member
    So, she needs 5K in 2020 (for just Fall semester) and
    mommdc wrote: »
    Isn't money the non-custodial parent gives to D for education untaxed income to her in the year received?

    So if she receives this $10k in 2020, assuming $5k in August and $5k in December, then that would be untaxed income for the 2022/23 FAFSA, right?

    I think this is what he's trying to avoid by changing the 529 ownership to his daughter. In that situation it's not counted as income, but the daughter would have to count the 529 as her asset.

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  • cptofthehousecptofthehouse 29870 replies59 threads Senior Member
    Congratulations in having some money set aside for college. Now let’s see how the FAFSA numbers played in with your daughter’s financial aid.

    Here is the problem:

    Your daughter is going to start college in fall of 2020, I assume. The FAFSA for the school year starting in Fall of 2020, ending in Spring of 2021 is what was used to calculate your DD’s family EFC. That FAFSA used 2018 income for her custodial parent and her. It also used assets as of the day she transmitted it.

    As the noncustodial parent, the 528 you have for her was not in the picture. When you turn it over to her, it is my understanding that you will be giving her assets which should be reported as untaxed income for that year for HER.

    That income will be reported on the FAFSA that she files. If you do this in 2020, she has to include that amount on her FAFSa that will affect her junior (3rd year ) of college. If she reports more than ~$6600 in income, that is assessed at 50%. The actual amounts in the 529s will show up immediately on the next FAFSA filed if you make the transfer in 2020 as assets but that is only assessed at about 6% so $20k in 529 money would only up the next FAFSA EFC by about $1200.

    The 529s you have for your kids puts you into the same situation that grandparents are when they have 529s for their grandchildren. There is a lot in the Internet addressing that situation. Those options would apply to you and your children

    A solution that grandparents use as a workaround is to gift money to the custodial parent as a conduit because money that does NOT appear in the FAFSA at all. If somehow you can transfer Money to a 529 in your Ex’s name that then immediately goes to payment to the school, you would avoid any FAFSA Reporting involvement Of those funds. I know you said you do not have a trusting relationship with your EX but perhaps you can work together on these once or twice a year transfers together pay your daughter’s college costs without affecting her financial aid.

    The other solution that grandparents and you can use is to wait until her third year of college before transferring the 529 funds to her. On a 4 year college schedule, your daughter will enter her junior year in fall of 2022. The financial aid for that year will have been filed the year before or that year and it would use 2020 income which would not include that 529 transfer. That 529 transfer would occur in 2022 which not impact her college years income since her 4th year, senior year would use 2021 income and you are in 2022 at that time, though any money left on the actual date she filed that FAFSa would have to be included. Careful timing could preclude that even, though if counted, we are talking only 6% not the 50% that student income can be hit. For the first two years of college, loans would be necessary if there is a gap and in a case like this, Co-signing those amounts with intention of paying them with 529 seems just fine to me. Both you and your Daughter can use 529 funds up to $10k each to repay student loans. This way $10k in freshman and sophomore years loans each can be paid from the 529 with junior and senior year money coming direcrcy from 529 to the school.

    You have this situation coming up again with your son. Remember that the income used for FAFSa is TWO years behind the fall school year that the student is matriculating. So if your son is expecting to start college fall of 2022, it’s this years income (2020) INCLUDING any transfer of 529 money that will be used on his FAFSA for that first year. You do NOT want him to get a 50% hit on those 529 amounts. If he is starting school after 2022 it might be wise to transfer 529 into his name so the financial impact is minimal (6% ) on FAFSA

    Be aware that if you transfer 529 ownership to someone , you lose control of the use of the funds. 529s are strict ownership transfers, some may not permit them especially if state tax breaks are involved. Since YOU would have gotten tax breaks in putting away that 529 Money in some state’s, if the funds are used in a way other than school and loan use, YOU would be subject to very messy recapture rules. I’ve avoided reading those rules and simply made sure our 529 money has gone towards allowed expenses.

    The merit award is a whole other subject. In many households, I’d a student loses merit money that is necessary to afford the school, that student has to find an affordable alternative, like commuting locally, going part time unless the college makes up that amount in financial aid. Unless a school guaranteed to meet full need, which few schools do, they rarely do other than with loans.
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  • mommdcmommdc 11652 replies31 threads Senior Member
    What is the FAFSA EFC for her for 2020/21?

    Does she even qualify for Pell or state grant with that EFC?

    Does she qualify for institutional need based aid at her school (based on FAFSA), in addition to merit scholarship?

    In other words, would she even miss out on any aid if her FAFSA EFC increases by $1,500 or so for junior and senior year?

    (Assuming you give her $10k from the 529 in year 2020 and that is counted as untaxed income on her 2022/23 FAFSA which by then might well have a dependent student income protection allowance (IPA) of $7,000 or more, so 50% of $3,000 would be added to EFC; for 2019/20 FAFSA EFC formula the dependent student IPA was $6,600, for 2020/21 FAFSA it is $6,800).
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  • thumper1thumper1 76073 replies3352 threads Senior Member
    @cptofthehouse

    It sounds like this non-custodial Parent is looking for a way to contribute his $10,000 toward college costs without impacting future need based aid.

    Since he does not feel confident gifting the money to his former spouse, I’m not sure there is a way to do this AND a share during his daughter’s freshman and sophomore years of college.

    Yes, he could transfer all of it before he files the FAFSA for her senior year (which will be able to be done in October of her junior year), but this doesn’t help him pay the college bills...and it also gives the daughter a 529 she needs to use for educational purposes.

    I have an idea. The daughter could take a loan...didn’t recent legislation offer the ability to repay $10,000 in loans using 529 accounts? Someone else here will have to clarify which loans fall under this. This $10,000 loan would be in addition to the Direct Loan the student can take.
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