Understanding the 529 Plan

Paying for College
1

<p>I want to make sure I understand how the 529 plan works. My DD is almost 18 and has a small 529 plan (under $2,000). I am the guardian.</p>

<p>As I posted recently, our family has been financially devastated by medical problems. We have spent all of our savings, including her college money (not the 529) and have incurred about $25,000 in credit card debt. The expenses are on-going, at least for this year. Over the past four years we have paid almost $200,000 for out-pocket medical expenses (our annual income is around $75,000). A good portion of this money helped my DD recover from a life-threatening illness.</p>

<p>There is someone thinking about attempting to raise money for DD’s college. From the posts on that thread I gathered that the 529 plan would be the best way to do this. My understanding is that we could use the existing 529 plan and people could contribute to it. It would be tax deductible to them as a gift. On our end, the money would technically belong to me, the custodian, who would decide how to spend it. Any qualified expense would be tax-free. </p>

<p>Since I am the guardian, the amount of the 529 would be an asset to my husband and I, which would increase our EFC. Do I have it right so far?</p>

<p>Because of our debt and medical expenses we will have a difficult time meeting our EFC. Can we use the 529 money for this on qualified expenses? </p>

<p>DD will be at community college in the upcoming year and then transfer. Would we be able to use this money for her rental expenses in the upcoming year (she will be living in an off-campus dormitory)? Would this be a qualified expense? If not, can we use it anyway and pay taxes on it?</p>

<p>Does this 529 money become hers at some point, or is it always our to distribute? </p>

<p>It was suggested that we could open a 529 account in a grandparent’s name, but she only has one 87 year old grandparent and that doesn’t seem wise to us. Also, we think that donating to an account with the family name and DD’s name would be more attractive.</p>

<p>Am I missing pieces or do I have this basically correct? Thanks!</p>

2

<p>Unless you’re a not-for-profit organization, I do not believe “donors” can claim a tax deduction for the gifts. Gift tax is something else. You’re identified as a recipient and you get to pay taxes on the gift amount.</p>

3

<p>Some states allow contributions to 529s to be either a direct tax credit or a tax deduction on the giver’s state income tax. </p>

<p>[State</a> Tax Breaks for 529 Plan Contributions](<a href=“http://www.petersons.com/college-search/529-plan-tax-breaks.aspx]State”>http://www.petersons.com/college-search/529-plan-tax-breaks.aspx)</p>

<p>Since your DD is a minor, any financial asset must be held in a custodian’s name. So her current 529 is owned by you (the parent) as custodian for the minor (your DD). Any parent-owned 529 is subject to special rules, which include the possibility that you can change the beneficiary. It does not become an asset owned by your DD when she reaches the age of majority in your state; it continues to be a 529 owned by the parent with the beneficiary being your DD.</p>

<p>All parent-owned 529s are reported on the FAFSA form as parent assets, and count towards your EFC at the rate of 5.6%. Parents have an asset protection allowance that’s around $50,000, depending on the age of the older parent. If the 529 is your only asset, then it will most likely fall under your asset protection allowance and not be counted at all.</p>

<p>Grandparent-owned 529s are not reported on the FAFSA, nor are any other 529s that are owned by others for the benefit of the student. That’s why you saw the suggestion of having a grandparent own the 529. You could also have the person responsible for collecting the funds open a 529 with your daughter as the named beneficiary. However, all of these non-family owned 529s must be reported on the CSS Profile form.</p>

<p>Funds in a 529 can be used to pay for qualified higher education expenses. Here’s a general list of what those are:</p>

<p><a href=“dummies - Learning Made Easy”>dummies - Learning Made Easy;

4

<p>Thank you! </p>

<p>It appears that our state, California, does not allow a tax break for 529 gifts.</p>

<p>As I understand it, the benefit to having the 529 in someone else’s name is that it will not show up in the FAFSA, but it will in the CSS Profile, which is only used by most private institutions.</p>

<p>So, in the second and subsequent years, the student would claim the amount from the 529 used in the previous year as income, correct? And if the 529 is in the parent’s name it is not counted as income to the student.</p>

<p>Are checks for a 529 account made out to the Custodian or the beneficiary? I think that in the event of a fund raiser it should be clear where the money is going - hence the student’s name or father’s name or, maybe, the name of a trust.</p>

5

<p>That’s right, California gives you no tax benefit for funds deposited into a 529. </p>

<p>You have a choice in how you receive the gifts; you can have them made out to the father who can the deposit them into the 529, or you can have them sent directly to the existing 529. If you’re using the Scholar Share plan, here’s more information:</p>

<p><a href=“Welcome to ScholarShare 529”>Welcome to ScholarShare 529;

<p>You should not have the checks made out to the student. The reason is that this becomes the asset of the student and would most properly be deposited into a student-owned account such as a savings account, a UTMA, or a student-owned 529. In the first two cases, student-owned funds are assessed by FAFSA at the rate of 20%. In the latter case, you can open a student-owned 529, again with the parent as custodian, but the student is then the owner and the beneficiary. Student-owned 529s are assessed at the same rate as parent-owned ones on FAFSA, that is to say at 5.6%.</p>

<p>Your understanding about whether the money withdrawn counts as income is correct; money coming from parent- or student-owned 529s is not reported as income on FAFSA. Money coming from 529s owned by others is reported as non-taxed income to the student on FAFSA during the year it is withdrawn.</p>

6

<p>Even when you do get a tax break, it’s not so straight forward. I get a state tax break on money deposited into a 529 that I own for the benefit of someone else. If I deposit into an account owned by my brother for the benefit of my nephew, I would not get a break.</p>

7

<p>Make sure that the 529 is set up so that it is in YOUR name, not your daughter’s. Otherwise it will have to be reported as your daughter’s money and FAFSA will hit it up at 20% towards the EFC with NO allowance. For the parent, it is only about 5% after allowance, big difference. Check and see that your 529 is titled the correct way.</p>

<p>Gifts are taxable to the giver, not the recipient and there is a large allowance ($13K? a year) so I would not worry about that. And I don’t know how tax breaks work for a 529 for someone outside of your child’s benefit. As Ordinarlylives states, it’s just the state tax where you get the break anyways.</p>

8

<p>529s are assessed at the rate of 5.6% by FAFSA regardless if they’re owned by the parent or by the student.</p>

9

<p>Many thanks to all of you for your very helpful responses!</p>