How 529 plans can hurt financial aid


Q. I set up a 529 for my great niece. Does this negatively impact her for college financial aid?
— Great Auntie

A. Congratulations on supporting your great niece’s education.

A 529 plan is a terrific vehicle for having funds grow free of tax as long as they are used for educational purposes.

There are also new changes that expand how 529 plan money can be used.

Starting in 2018, $10,000 of money in these plans can be used toward elementary and high school education each year, said Frani Feit, a certified financial planner with Tradition Capital Management in Summit.

In order to determine the plan’s financial aid impact for college, let’s take a step back and review how colleges look at both student and parent income and assets to determine the family’s ability to pay.

Feit said percentages are applied to income streams and asset values and those calculated amounts reduce a student’s financial aid package.

Approximately 20 percent of a student’s assets and 50 percent of a student’s income, after certain allowances, is counted, Feit said.

For parents, 2.6 to 5.64 percent of a parent’s assets are counted. This is on a sliding income scale after certain allowances, she said.

For parent income, 22 to 47 percent, also on a sliding income scale and after certain allowances, is counted.

You should also understand some recent changes to the Free Application for Federal Student Aid, commonly called FAFSA.

Beginning with the 2017-2018 FAFSAs, students can now file on Oct. 1 rather than Jan. 1 and tax return information is now required from an earlier tax year – two years earlier instead of the prior year.

“Assuming your niece begins college in the fall of 2018, she will use tax information from 2016,” Feit said. “Any money received from the 529 plan will be listed as her income and counted at 50 percent; if she delays taking the funds until her junior year – Fall 2020-2021 – the income reported will not reflect on a FAFSA until 2022 at which point she will have graduated.”

The bottom line is that when a non-parent relative owns the 529 plan, the money inside the plan does not count against aid until it’s withdrawn, Feit said. Then the funds count as student income, which can hurt anticipated aid by 50 percent of the money withdrawn.

“Proper timing of withdrawals can help alleviate this issue,” she said.

Another tip? Tuition payments made directly to a college or university are not subject to the annual $15,000 gift tax exclusion. So if you were feeling particularly generous, a check can be paid to the university to cover full tuition, Feit said.

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