Financial Planning
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Parents as account owner: Under federal financial aid rules, the value of a 529 plan is listed as a parent asset on the government's aid form, the FAFSA, if the parent is the account owner. A 529 plan that is owned by a student or funded with UTMA/UGMA assets is also reported as a parent asset on the FAFSA if the student is a dependent student. Under the federal aid formula, a parent's assets are assessed (counted) at a rate of 5.6% (this means that 5.6% of a parent's assets are deemed available to put toward college expenses each year). Later, any money withdrawn from the 529 account is not counted again as student income— a positive situation.
Grandparents as account owners: The rules are different for grandparent-owned 529 accounts. If a grandparent (or other relative) is the account owner of a 529 plan, then it is not listed as a parent asset or student asset on the FAFSA. So it doesn't count as an asset at all. However, withdrawals from a grandparent-owned 529 account are counted as student income on the FAFSA the following year. Under federal aid rules, student income is counted at 50%, which means that a student's financial aid eligibility could drop by 50% in the year following a 529 plan withdrawal.
For example, let's say you make a $40,000 withdrawal from your 529 account in Year 1 for your grandchild's college expenses. In Year 2, the FAFSA will count that $40,000 as student income and assess it at 50%, with the result that your grandchild's aid eligibility would be reduced by $20,000 (50% of $40,000). To prevent this situation, one option is to wait until your grandchild has submitted his or her last FAFSA before withdrawing money from the account.
Colleges set their own rules when deciding how to award their own financial aid, and most generally follow the federal treatment of 529 plans. However, colleges may differ in their treatment of plan withdrawals. Contact the financial aid administrator at your child's college for more information.
Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
This content has been reviewed by FINRA.
How will my 529 plan be treated for financial aid purposes?
Grandparents as account owners: The rules are different for grandparent-owned 529 accounts. If a grandparent (or other relative) is the account owner of a 529 plan, then it is not listed as a parent asset or student asset on the FAFSA. So it doesn't count as an asset at all. However, withdrawals from a grandparent-owned 529 account are counted as student income on the FAFSA the following year. Under federal aid rules, student income is counted at 50%, which means that a student's financial aid eligibility could drop by 50% in the year following a 529 plan withdrawal.
For example, let's say you make a $40,000 withdrawal from your 529 account in Year 1 for your grandchild's college expenses. In Year 2, the FAFSA will count that $40,000 as student income and assess it at 50%, with the result that your grandchild's aid eligibility would be reduced by $20,000 (50% of $40,000). To prevent this situation, one option is to wait until your grandchild has submitted his or her last FAFSA before withdrawing money from the account.
Colleges set their own rules when deciding how to award their own financial aid, and most generally follow the federal treatment of 529 plans. However, colleges may differ in their treatment of plan withdrawals. Contact the financial aid administrator at your child's college for more information.
Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
