My child’s godfather has a 529 that he set up for her use but he owns it. I was told that I did not have to claim it on her freshman fafsa since we do not own it. After that, any amount she uses will have to be declared as her untaxed income. I know that fafsa is changing starting next year so that we claim one year back on income. Does anyone know if that means her untaxed income (529 usage for freshman year) won’t be reported next year but rather the year after that? I’m just trying to make the most out of those funds. Any suggestions are appreciated.
You are right; a 529 account owned by the student’s godfather is not reported on FAFSA as an asset (either student or parent), but distributions from the account made for the benefit of the student will need to be reported as student untaxed income under the “money received or paid on your behalf” question.
With the change in FAFSA reporting (transitioning to prior-prior year), any distribution in 2016 will be reported on the FAFSA for academic year 2018-2019. So assuming your daughter will be starting college this coming fall and there will be a distribution from the 529 to pay for expenses later this year, that distribution will be reported on the FAFSA that will be used to calculate aid for her junior year. If you can hold off on using the money from her godfather’s 529 account until spring of her sophomore year, none of the distributions from the 529 account will be reported on FAFSA, assuming she finishes college in four years.
You could avoid the reporting if the godfather “rollover” the 529 to the student, then the student withdraw the 529 for schooling.
Thanks BelknapPoint. We will have to use the 529. We are eligible for some financial aid, but I guess we will lose that her junior and senior years.
Thanks 4kidsdad. If her godfather rolled it over to her, wouldn’t she have to claim it as her asset? Can he roll it to her since she is not a family member?
If you are suggesting what I think you are suggesting, this wouldn’t be a rollover, it would be a change in ownership. Not all plans allow a change in ownership. Also, if the ownership is changed to the student the asset would now be reportable on FAFSA (as a parent asset), and the transfer to the student would probably have to be reported on FAFSA as a gift/untaxed student income in the same manner that distributions would need to be reported if the godfather retained ownership, except now it would be the entire account balance that would need to be reported as opposed to just the amount that was distributed for college expenses in any particular tax year. Finally, depending on the amount of money involved, there might be gift tax reporting requirements.
Will the assets also go to ‘prior prior’ ? The actual 529 contribution will not change the students taxes, just which tax year is used. Why would the payment on behalf of the student or to the student not be counted until 2 years later? The assets are going to be claimed as they currently stand on fafsa filing day, not two years prior.
No, assets will continue to be reported as of the day that FAFSA is completed.
Because such a payment is counted as untaxed income, and income will be based on the prior-prior tax year.
Thanks twoinanddone…that’s my understanding also. That assets are claimed each year on the fafsa filing day but income is prior prior–I just wasn’t sure if that included what will be counted as her untaxed income from the 529 distribution. I just want to have an idea how much each year will cost before she commits to her dream school. It’s so complicated!