01 Oct How will the FAFSA look at this account?

Q. My 17-year-old son has a custodial account. He will be 18 in December and we will be completing the FAFSA and CSS Profile sometime in October. It’s our understanding that when applying for financial aid, because the account is in his name, it will be looked at as 20 percent being used annually for his education as opposed to 5.64 percent if the account was in our names. We would like to protect his assets. Could we convert it to a 529 account and what happens with taxes?

— Mom

A. Let’s start with the financial aid process. To get financial aid for college, you must submit the Free Application for Federal Student Aid, or FAFSA. But your school may also want you to submit the CSS Profile, an additional application that determines state and institutional aid.

While both methodologies are different, they are both designed to determine the family’s financial strength and how much they can contribute towards education costs, said Matt Mignon, a certified financial planner with RegentAtlantic in Morristown.

You’re correct that student assets are weighted more heavily than parent assets when calculating financial aid eligibility.

As you said, custodial accounts are considered assets of the student.

“This means that custodial accounts have a high impact on financial aid eligibility,” Mignon said. “Now just because this account has a high impact on his financial aid eligibility doesn’t mean that you must use it for college.”

If your goal is to preserve the account and you have the ability to do so, then you can still preserve it for your son, he said. No one is going to force you to spend the account on college costs – but it will still be counted in the financial aid formulas.

But if the goal is to use this account for college, then converting it to a 529 account might make sense to maximize financial aid eligibility, Mignon said.

A 529 plan of a dependent student is treated as an asset of the parent on the FAFSA, he said. This means that a 529 college savings plan has a lower impact on financial aid eligibility. If you decide to go this route, he recommends using a 529 plan with a robust investment menu consisting of low-cost fund options.

Finally, let’s talk about taxes.

“Custodial accounts are taxable, so your child has and will owe taxes on income and realized capital gains within this account. 529 accounts, on the other hand, are completely tax-free,” he said. “The investment earnings within the account are tax-free and any withdrawals are also tax-free as long as they are for qualified education expenses.”

Before you make a move, speak to a financial advisor about the specifics of your situation so your family’s entire financial picture can be considered.

Email your questions to Ask@NJMoneyHelp.com.

This story was originally published on Oct. 1.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.