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BEEFjerKAY said:   Even with an up front tax advantage, in some cases 529s can be inferior in the long run.

Variables include:
1. the amount of tax advantage
2. The number of calendar years you will have children in college
3. the amount of time the money has to be in the 529 to claim the tax credit
etc.

And then there's the whole question of how long to keep the money in the 529. Sometimes it can be useful to put money into a 529, but not keep it there.

For instance, a successful during-college funding strategy in Illinois is to put the money in a 529, then withdraw 10 days later.

Of course, Illinois used to not reclaim the tax credit if you did not use the funds for college. So ymmv.


would appreciate it if you elaborate on your first sentence.......thanks.

re: the 10 day duration in 529 plan............is the benefit the state tax credit?

young parents with young kid with high incomes and maxed out accounts have to do something with the money now. If they are W-2 employees, their choices are taxable investing or 529 investing or life insurance contracts or side businesses. I'll stick with the liquidity and certainty of 529 investing over those other choices. If it makes sense to consider more advanced strategies closer to college, when FAFSA policies will certainly have changed, we can certainly consider it.

I found this in a wiki on 529 plans on another forum :
**********************************************************************************
California: Changes in account owner are reported as non-qualified distributions subject to all applicable federal and state taxes and penalties.
***************************************************************************************
Based on the wiki,
CA appears to be the only state that has this. Can someone confirm/verify this is true (preferably w/ a link to another source).
Is this true even if transfer is at original owner's death e.g. from grandparent to parent. I am assuming this only pertains to the official CA plan
and not to other plans if you are a CA resident?

kaneohe said:   BEEFjerKAY said:   Even with an up front tax advantage, in some cases 529s can be inferior in the long run.

Variables include:
1. the amount of tax advantage


would appreciate it if you elaborate on your first sentence.......thanks.

re: the 10 day duration in 529 plan............is the benefit the state tax credit?


1. If you get a 3% one-time tax credit for putting the money in, but get hit with a 5.6% financial aid penalty for each and every year you have in college, a 529 isn't worth it.

2. In Illinois, the effective minimum amount of time you have to leave the money in a 529 is 10 days.

- Wait until FAFSA/CSS is filed
- Put $10k in Brightstart
- Wait 10 days
- Drain it
-Claim the 5% tax on the next year's state taxes.

Only works in years where you have eligible educational expenses.

psychtobe said:   If it makes sense to consider more advanced strategies closer to college, when FAFSA policies will certainly have changed, we can certainly consider it.

That;s why I consistently recommend not getting too worked up about all of this until your eldest child is in 7th or 8th grades.

Before that time, the key word is "moderation". Don't over fund the 529, don't start a shell business, etc etc. Keep your options open.

Generally, 4-5 years can be enough time to create and implement an effective plan.

kaneohe said:   I found this in a wiki on 529 plans on another forum :
**********************************************************************************
California: Changes in account owner are reported as non-qualified distributions subject to all applicable federal and state taxes and penalties.
***************************************************************************************
Based on the wiki,
CA appears to be the only state that has this. Can someone confirm/verify this is true (preferably w/ a link to another source).
Is this true even if transfer is at original owner's death e.g. from grandparent to parent. I am assuming this only pertains to the official CA plan
and not to other plans if you are a CA resident?


I am pretty sure that you have a bad source. I'm guessing that the source is the Boglehead Wiki. If it is, it actually links to savingforcollege.com. That latter source does not say that, but it does show other states that do this. Historically, savingforcollege.com has been a very reliable source. However, with that site being purchased by the gradsave people, I have no idea if it is still reliable. The best source is to check the individual plan. https://www.scholarshare.com/documents/ca_disclosure.pdf

It says, "You may change ownership of your Account to another individual or
entity that is eligible to be a Participant by submitting the applicable Plan Form....A change in Account
ownership may have federal or state tax consequences, and Participants are urged to consult their own
tax advisors prior to requesting any such change..."

kaneohe said:   I found this in a wiki on 529 plans on another forum :
**********************************************************************************
California: Changes in account owner are reported as non-qualified distributions subject to all applicable federal and state taxes and penalties.
***************************************************************************************
Based on the wiki,
CA appears to be the only state that has this. Can someone confirm/verify this is true (preferably w/ a link to another source).
Is this true even if transfer is at original owner's death e.g. from grandparent to parent. I am assuming this only pertains to the official CA plan
and not to other plans if you are a CA resident?


Let's think about this for a second. Imagine that you have two 529 plans with two different states. One reports changes of beneficiaries to the IRS as a non-qualified distribution and one does not. It makes absolutely no sense that one of the distributions would be qualified and one wouldn't. A state doesn't get to decide whether something is qualified or non-qualified for Federal Tax purposes. Regardless of what a state reports, this kind of transfer is either qualified or non-qualified. Both would be the same. Am I missing something here? Also, I am pretty sure that states don't report distributions as "qualified" or "non-qualified". It would simply be a distribution.

Are changes of owners qualified distributions (other than by death)? I don't think that we know.

BEEFjerKAY said:   psychtobe said:   If it makes sense to consider more advanced strategies closer to college, when FAFSA policies will certainly have changed, we can certainly consider it.

That;s why I consistently recommend not getting too worked up about all of this until your eldest child is in 7th or 8th grades.

Before that time, the key word is "moderation". Don't over fund the 529, don't start a shell business, etc etc. Keep your options open.

Generally, 4-5 years can be enough time to create and implement an effective plan.


so preferentially save in a taxable brokerage account than a 529, to keep options open? Incurring 18.8-23.8% capital gains/dividend taxes along the way? I'm not saying you're wrong; I'm asking if that is what you recommend.

BrodyInsurance said:   kaneohe said:   I found this in a wiki on 529 plans on another forum :
**********************************************************************************
California: Changes in account owner are reported as non-qualified distributions subject to all applicable federal and state taxes and penalties.
***************************************************************************************
Based on the wiki,
CA appears to be the only state that has this. Can someone confirm/verify this is true (preferably w/ a link to another source).
Is this true even if transfer is at original owner's death e.g. from grandparent to parent. I am assuming this only pertains to the official CA plan
and not to other plans if you are a CA resident?


Let's think about this for a second. Imagine that you have two 529 plans with two different states. One reports changes of beneficiaries to the IRS as a non-qualified distribution and one does not. It makes absolutely no sense that one of the distributions would be qualified and one wouldn't. A state doesn't get to decide whether something is qualified or non-qualified for Federal Tax purposes. Regardless of what a state reports, this kind of transfer is either qualified or non-qualified. Both would be the same. Am I missing something here? Also, I am pretty sure that states don't report distributions as "qualified" or "non-qualified". It would simply be a distribution.

Are changes of owners qualified distributions (other than by death)? I don't think that we know.


BI........thanks for your replies. Yes it is BH forum. Do we know that change of owner by death of original does not have adverse consequences?

We do know that. I'm not sure that I can find documentation for you.

BrodyInsurance said:   We do know that. I'm not sure that I can find documentation for you.

Thanks......would seem an injustice if death of owner was penalized like that.

We have a 2 year old and twin 3 month olds. We will have 3 in college at the same time for at least 2 years, so i have a lot of reading and research to do!

kaneohe said:   BrodyInsurance said:   We do know that. I'm not sure that I can find documentation for you.

Thanks......would seem an injustice if death of owner was penalized like that.


There are a couple of exceptions, but I wouldn't call them a penalty.

1)If accelerated gifting is used, the amount that has been accelerated would still be part of the owner's estate.
2)If it is an UTMA/529 any money that is gifted from the custodian is still part of the custodian's estate.

BrodyInsurance said:   Dependency:

just have your kid say his "dad" is some low-income relative on your (the real dad's) side of the family. that way, if there were an FAFSA audit, the last names would match.



Independency:

marriage: good, but might be hard to find somebody willing to play along

emancipation: looks easy. you & your kid just need to say that you two don't get along & that he has someone else willing to support him (like a grandparent). your child could get emancipated right after finishing 11th grade & do his senior yr. through an online charter school.


I would hope that these are not serious suggestions, but the problem is that they aren't funny enough to be taken any other way. Duckyhood, can we safely assume that you are not a parent?

"Hey kid, go get married. Your mom, your girlfriend, and your priest won't mind once we explain that it is a sham marriage to try to get more financial aid.

"Hey kid, you know how you were looking forward to starting on the basketball team this year and ruling the school with your senior friends, and the prom, and .... well, forget about it. Instead, we are pulling you out of school to try to scam the financial aid system. You need to start pretending that you don't live here anymore and are self supportive."


my suggestions were for people operating at a certain level.

if you're actually religious or worry about what "mom would think," then you're likely operating at a very different level than the intended audience for my advice.

if your kid is into "starting on the basketball team," "ruling the school" or "attending prom," then he's likely operating at a very different level too.

just stick with the "conventional" strategies, & enjoy the next 20 yrs of paying off college debt.

cooldude9919 said:   We have a 2 year old and twin 3 month olds. We will have 3 in college at the same time for at least 2 years, so i have a lot of reading and research to do!

The only thing that you should be doing in regard to future financial aid is ignoring it for now.

Unsolicited advice from an insurance salesman: Make sure that you have adequate life and disability income insurance!

duckyhood said:   BrodyInsurance said:   Dependency:

just have your kid say his "dad" is some low-income relative on your (the real dad's) side of the family. that way, if there were an FAFSA audit, the last names would match.



Independency:

marriage: good, but might be hard to find somebody willing to play along

emancipation: looks easy. you & your kid just need to say that you two don't get along & that he has someone else willing to support him (like a grandparent). your child could get emancipated right after finishing 11th grade & do his senior yr. through an online charter school.


I would hope that these are not serious suggestions, but the problem is that they aren't funny enough to be taken any other way. Duckyhood, can we safely assume that you are not a parent?

"Hey kid, go get married. Your mom, your girlfriend, and your priest won't mind once we explain that it is a sham marriage to try to get more financial aid.

"Hey kid, you know how you were looking forward to starting on the basketball team this year and ruling the school with your senior friends, and the prom, and .... well, forget about it. Instead, we are pulling you out of school to try to scam the financial aid system. You need to start pretending that you don't live here anymore and are self supportive."


my suggestions were for people operating at a certain level.

if you're actually religious or worry about what "mom would think," then you're likely operating at a very different level than the intended audience for my advice.

if your kid is into "starting on the basketball team," "ruling the school" or "attending prom," then he's likely operating at a very different level too.

just stick with the "conventional" strategies, & enjoy the next 20 yrs of paying off college debt.


No, ducky, this isn't about "conventional strategies". This is about strategies that are legal. What is "different level" about a child who wants to enjoy his senior year in school?

This may be a dumb question, but if 5.6% of the 529 will be considered part of the expected family contribution, but I get a tax deduction in my state (NY) where my marginal state rate is 6%+, is it really that bad an idea to use a 529?

johnnyb82 said:   This may be a dumb question, but if 5.6% of the 529 will be considered part of the expected family contribution, but I get a tax deduction in my state (NY) where my marginal state rate is 6%+, is it really that bad an idea to use a 529?

It's not a dumb question. The tax deduction is helpful, but you have to look at the bigger picture. The tax deduction is a one year thing on a small amount of money. The EFC is on an unlimited amount of money over multiple years.

Ex. Johnny puts $10,000 into his 529 plan every year for the next 10 years. He will save $300 on his taxes every year for the next 10 years (6% of 5000) for a total of $3,000. At 8% growth, the value of the 529 plan will be $156,000. That increase the EFC in the first year by about $8,700. The remaining balance will also impact aid every year. This is just one example, but it could be $3000 in savings vs. $30,000 of additional EFC.

But, don't take that to mean that I'm saying not to use a 529 plan. If the money would otherwise be a counted asset and/or it isn't going to change the EFC, the tax deduction is certainly beneficial and the money will be tax free.

The tax deduction is a benefit, but not a reason to do it.

Maybe not so funny. I think that people really do need to do the math. What if my family makes 52k and we have 3 children. I kill myself teaching summer school and an extra class during the regular school year for an extra 17k a year. I think it would be worth putting the numberss into an online fafsa calculator to see if the extra financial aid I receive for 52k a year would be worth not doing my extra jobs.


jimmywalt said:   cheapdad00 said:   OP, you need to reduce your income in the years leading up to your children starting college. Are you a wage slave or a business owner? If the second, there should be some creative way to take lesser salary and leave the profits in the business in order to qualify for more financial aid. There are some on this board who have more creative ideas on how best to perform that function and not be in violation of any laws.

That is the FUNNIEST thing I've ever read in my life!

Lower your wages so that you can get some free money.

Let me check the math on that.... $250K per year --- go down to $80K per year ($170K less) times 4 years is $680K so that your child might get some funding. The kid would have to get $680K or more to make your crazy idea even remotely make any sense.

That's like if a person says "I don't want a raise because I'll pay more in taxes".

I often say this in the Finance thread............ "Don't take advice from broke people. They are broke for a reason!"

Where else could you put it to avoid the 5.6% EFC? Isn't any parental asset subject to the same factor? I'm assuming the retirement accounts are already maxed out.

cooldude9919 said:   We have a 2 year old and twin 3 month olds. We will have 3 in college at the same time for at least 2 years, so i have a lot of reading and research to do!

My children are the same age spread. My twins are 23 months younger than my daughter. I am looking at running the numbers for my daughter having a gap year. I received a lot of negative comments from people who felt that a gap year would prevent her from going back to school but I think that there are a lot of positive experiences a young person could have. We have relatives who live in Paris and Africa and perhaps we could look at international experiences and service project experience. And of course this would mean that we would have 3 in college at the same time for 3 years.

kaneohe said:   Where else could you put it to avoid the 5.6% EFC? Isn't any parental asset subject to the same factor? I'm assuming the retirement accounts are already maxed out.

No. Look at a FAFSA application. It will tell you what gets counted and what doesn't get counted.
It should not be difficult for most people to turn their countable assets into non-countable assets.

cindihounton said:   cooldude9919 said:   We have a 2 year old and twin 3 month olds. We will have 3 in college at the same time for at least 2 years, so i have a lot of reading and research to do!

My children are the same age spread. My twins are 23 months younger than my daughter. I am looking at running the numbers for my daughter having a gap year. I received a lot of negative comments from people who felt that a gap year would prevent her from going back to school but I think that there are a lot of positive experiences a young person could have. We have relatives who live in Paris and Africa and perhaps we could look at international experiences and service project experience. And of course this would mean that we would have 3 in college at the same time for 3 years.


I'd feel sorry for you financially except for the fact that I'll have four in college at the same time.

kaneohe said:   Where else could you put it to avoid the 5.6% EFC? Isn't any parental asset subject to the same factor? I'm assuming the retirement accounts are already maxed out.


Can't do backdoor Roth?

BrodyInsurance said:   Look at a FAFSA application. It will tell you what gets counted and what doesn't get counted.
It should not be difficult for most people to turn their countable assets into non-countable assets.


Especially true for FAFSA. CSS Profile take a bit more time and effort, but similar transformations can be achieved.

BrodyInsurance said:   kaneohe said:   Where else could you put it to avoid the 5.6% EFC? Isn't any parental asset subject to the same factor? I'm assuming the retirement accounts are already maxed out.

No. Look at a FAFSA application. It will tell you what gets counted and what doesn't get counted.
It should not be difficult for most people to turn their countable assets into non-countable assets.


You and beef keep coming with the cryptic comments.

Give me a tangible example of how to turn $500,000 or $2,000,000 or $5,000,000 in countable assets into non-countable assets. Assume all the usual and easy tax breaks are filled up, and assume the house is paid off. Remember that "it should not be difficult" in your words, and let's remember not to let the tax tail wag the asset dog. So don't give me an example of how someone can buy an overpriced life insurance product that they don't need, unless the net advantage (additional non-loan aid) exceeds the disadvantage (cost in fees and expenses; loss of liquidity; converting capital gains to normal income); and let's not throw out "just start a million dollar business" since the obvious undiversified risk component of such a venture would make small potatoes of the potential financial aid benefits. And let's also remember that most people who have $500k or $2,000k or $5,000k in countable assets and maxed out accounts and a paid off home by the time their kids are hitting college also have very high incomes, so they're not going to appear "asset poor, income poor" on their application regardless.

So far this thread is just one big fat tease. I got more excited watching Cybill Shepherd in Taxi Driver last night.

cindihounton said:   cooldude9919 said:   We have a 2 year old and twin 3 month olds. We will have 3 in college at the same time for at least 2 years, so i have a lot of reading and research to do!

My children are the same age spread. My twins are 23 months younger than my daughter. I am looking at running the numbers for my daughter having a gap year. I received a lot of negative comments from people who felt that a gap year would prevent her from going back to school but I think that there are a lot of positive experiences a young person could have. We have relatives who live in Paris and Africa and perhaps we could look at international experiences and service project experience. And of course this would mean that we would have 3 in college at the same time for 3 years.


Having all three in college at the same time is OPTIMAL.

Another option would be to have the twins start college a year early, possibly by taking classes at a local community college.

There are some important rules you would need to follow, but if done correctly it could result in having all 3 kids in college for the exact same 4 years.

Since EFC is the same regardless of the number of kids in college, having all of your kids in college at the same time maximizes the amount of need-based aid you will receive.

Also, depending on the school, having the twins in community college during the eldest's freshman year can help ensure the critically important "base year" is as low as possible.

psychtobe said:   Give me a tangible example of how to turn $500,000 or $2,000,000 or $5,000,000 in countable assets into non-countable assets. Assume all the usual and easy tax breaks are filled up, and assume the house is paid off.

Send me the following:
- your tax returns for the past 2 years
- your w-2s
- a complete listing of all of your assets (educational, retirement and otherwise), broken out into the same categories as used in both the FAFSA and CSS Profile.
- a complete listing of any assets others might have (such as grandparents) where your child is the beneficiary
- Provide me with the name of your employer and the description of your current position
- The ages of your children
- your children's SAT and or ACT scores
- A list of the 3-5 schools your child is most likely to attend
- An indication of the major you child might pursue

And I will send you an indication of how to pull this off. And in return for valuable, specific financial assistance, it would seem only fair for you to send me something of meaningful economic benefit in return.

Not being a tease. Keep in mind financial aid uses the tax code as a base and then adds additional layers of complication. Some of which vary by state. Some of which vary by school. And many of which vary between the FAFSA and CSS Profile.

And if I'm going to spend 5-10 hours researching some of the nuances that likely are unique to your situation, please excuse me if I'd want something in return. I'm just not that nice of a guy I guess.

Few folks are subject to all of the above complications. But most people are subject to at least 2 or 3 or more.

psychtobe said:   You and beef keep coming with the cryptic comments.

Brody has given several very specific examples where he lays out a well articulated situation, details the steps involved and runs the math.

As have I in other threads.

Many motivated families can save up countable assets of nearly 500k even on fairly moderate incomes.

edit: A reasonable sketch of the impact of moving $1mm from exposed assets to an annuity now can be found in the next 20-30 postings in this thread. (if i counted correctly)

psychtobe said:   So don't give me an example of how someone can buy an overpriced life insurance product that they don't need, unless the net advantage (additional non-loan aid) exceeds the disadvantage (cost in fees and expenses; loss of liquidity; converting capital gains to normal income);

A working example of which was provided in a previous thread, if I recall.

psychtobe said:   BrodyInsurance said:   kaneohe said:   Where else could you put it to avoid the 5.6% EFC? Isn't any parental asset subject to the same factor? I'm assuming the retirement accounts are already maxed out.

No. Look at a FAFSA application. It will tell you what gets counted and what doesn't get counted.
It should not be difficult for most people to turn their countable assets into non-countable assets.


You and beef keep coming with the cryptic comments.

Give me a tangible example of how to turn $500,000 or $2,000,000 or $5,000,000 in countable assets into non-countable assets. Assume all the usual and easy tax breaks are filled up, and assume the house is paid off. Remember that "it should not be difficult" in your words, and let's remember not to let the tax tail wag the asset dog. So don't give me an example of how someone can buy an overpriced life insurance product that they don't need, unless the net advantage (additional non-loan aid) exceeds the disadvantage (cost in fees and expenses; loss of liquidity; converting capital gains to normal income); and let's not throw out "just start a million dollar business" since the obvious undiversified risk component of such a venture would make small potatoes of the potential financial aid benefits. And let's also remember that most people who have $500k or $2,000k or $5,000k in countable assets and maxed out accounts and a paid off home by the time their kids are hitting college also have very high incomes, so they're not going to appear "asset poor, income poor" on their application regardless.

So far this thread is just one big fat tease. I got more excited watching Cybill Shepherd in Taxi Driver last night.


Personally, if I had $5,000,000 in assets and a very high income, I wouldn't be overly concerned about the cost of college. You are asking about making assets disappear. You are correct that making assets disappear is only helpful if it helps the aid picture. BEEFjerKAY is much more knowledgeable on the whole aid picture than I am. I am simply pointing out that for FAFSA purposes it is easy to make assets disappear. Have $1,000,000 in bank accounts? Put it in a fixed annuity instead. It could lower your EFC by $56,400. Is that tangible enough?

What are the tax and fee/expense/cost consequences of doing that, though? What's the exit strategy? What kind of annuity rates can a 49 year old get? How does that compare to the expected returns of a diversified low cost tax-efficient investment portfolio?

I am not asking these questions to be difficult; only to understand without smoke and mirrors.

BJK - can you provide the thread or link (or a hint so I can find it)? As for the specific offer - perhaps in 7 years we should talk. My daughter just turned six. And I don't have $5,000,000 in countable assets.

I honest to goodness feel like I'm in a Kafka novel. Can someone please give me a straight answer?

BrodyInsurance said:   wilked said:   Agreed. As of now I think I understand the UTMA strategy as this:

*If you have two or more college-bound children, consider putting any college savings (up to the max allowed in a 529) into a 529 plan under a UTMA for the youngest child. By doing this, the money will be 'shielded' from the FAFSA forms for all older children as they enter college. This allows 529 savings without being 'taxed' the 5.6% for the savings within the FAFSA (until the youngest child enters college, at which point you would have to declare 5.6% of the balance). If instead you 'spread around' the 529 equally into typical accounts, you will get double (or triple or more) penalized, as each year's FAFSA for each child would tax the total 529s, regardless of which child was the beneficiary.

Beyond that, I have heard topics of:
-salary reduction, possibly via
-business ownership
-strategies both for maximizing home equity and minimizing home equity
-annuities

But no concrete descriptions of how it works and the tangible benefits


In general, the asset strategies are nothing more than understanding what counts as an asset and what doesn't. I'll use myself as an example projecting my situation into the future. When my oldest is a senior and filling out the FAFSA, I will also have a junior, sophomore, and, freshman in a private H.S. Let's assume that the tuition for each of them will be $25,000 and I have $500,000 sitting in my checking/savings accounts.

Let's just focus on that $500,000. That $500,000 translate to having to pay around $28,000 for college. How do I get rid of this money to lower what I need to pay? There are many ways, but here is one.

1)Put $25,000 into an UTMA for child #2. 2)Put $50,000 into an UTMA for child # 3. 3)Put $75,000 into an UTMA for child #4. This pays for 1, 2, and 3 years of their private school respectively.

After doing that, I only have $350,000 which gives me an EFC (expected family contribution) of $19,600.

If I put $200,000 into my mortgage, I'm down to $150,000 and an EFC of $8,400.

If I then take that other $150,000 into an annuity, I will be down to $0, and an EFC of $0.

Of course, there will be more to my financial situation, but the point is that much of this isn't much more complicated than knowing what is counted and what isn't counted based upon the formula that a school uses.


you're eating into your lifetime exclusion with step #1. That raises taxes later, by 40% of the amount you gave away over $28,000 per couple per child.

psychtobe said:   BrodyInsurance said:   kaneohe said:   Where else could you put it to avoid the 5.6% EFC? Isn't any parental asset subject to the same factor? I'm assuming the retirement accounts are already maxed out.

No. Look at a FAFSA application. It will tell you what gets counted and what doesn't get counted.
It should not be difficult for most people to turn their countable assets into non-countable assets.


You and beef keep coming with the cryptic comments.

Give me a tangible example of how to turn $500,000 or $2,000,000 or $5,000,000 in countable assets into non-countable assets. Assume all the usual and easy tax breaks are filled up, and assume the house is paid off. Remember that "it should not be difficult" in your words, and let's remember not to let the tax tail wag the asset dog. So don't give me an example of how someone can buy an overpriced life insurance product that they don't need, unless the net advantage (additional non-loan aid) exceeds the disadvantage (cost in fees and expenses; loss of liquidity; converting capital gains to normal income); and let's not throw out "just start a million dollar business" since the obvious undiversified risk component of such a venture would make small potatoes of the potential financial aid benefits. And let's also remember that most people who have $500k or $2,000k or $5,000k in countable assets and maxed out accounts and a paid off home by the time their kids are hitting college also have very high incomes, so they're not going to appear "asset poor, income poor" on their application regardless.

So far this thread is just one big fat tease. I got more excited watching Cybill Shepherd in Taxi Driver last night.


On the less creative end, it may make sense for certain people to structure their non-retirement account assets in such a way as to include a low-cost variable annuity. Depending on one's age, whether or not there is a workplace pension, how many years one would want to "hide" assets for, etc. the net increased cost, loss of liquidity, and opportunity cost may be trifling relative to the increase in aid. Put another way, avoiding 5.6% per year drag makes 0.4% increase in expenses not sound so crazy.

Similarly, fixed annuities can make a lot of sense for a lot of people, and have returns comparable to CD's, but unlike CD's don't count toward FAFSA. If you are the sort of person who would otherwise own CD's, and you can wait until you're 59.5 and/or you're in a low interest rate environment where a 10% penalty on your gains won't sting too badly in the event you can't wait, this might not be a crazy place to "disappear" some assets.

For those relatively few people for whom permanent life insurance makes sense, (a group which might overlap with those who might otherwise want to shelter assets), certain insurance products can be structured in such a way as to essentially behave like fixed income assets, with lower expected return than total bond market but probably less risk too. If I am not mistaken, this may be one of the few instances where one might go out of their way to actively try to MEC a policy depending on how far in advance they got started on their planning.

On the more creative end, google "fafsa family business," and consider that there are essentially an unlimited variety of businesses one and one's family can be engaged in. Some are riskier than others, but lots of people already find a reason to invest in businesses of whatever sort, whether they be real estate, restaurant franchises, or anything else. Although many businesses might be riskier than a total market index fund, they could still fit reasonably and profitably into a well-diversified portfolio.

Will these strategies make sense for everyone? No, of course not, but let's pretend that you've got an 8 year old, a 4 year old, and a newborn. Assuming that tuition at an Ivy continues to rise at the historical average of about 6 percent, meaning that school will cost $200 grand a year by the time you're youngest is done, and assuming that you've got $2.5 million in unprotected assets by the start of school, it could end up costing around half of your unprotected assets to put your kids through undergraduate. That represents an enormous impact in the quality of your life and adds years to how long you have to work to have a comfortable retirement.

So let's pretend you decide to go whole-hog and put all non-retirement assets into some combination of annuities, insurance, and the family business. Yes, your portfolio might not be optimized like it could be with a perfectly-apportioned mix of vanguard index funds, but it's not outrageously far off if done correctly, the growth in your investments no longer counts much if anything toward income, and you just got yourself a whole lot closer to saving over a million dollars in tuition. What about losing out on preferential tax rates on capital gains and dividends, and step-up at death? It would potentially hurt some, but it might not be so painful if you can wait until 59.5 and retirement, at which point you can put your capital back into the taxable space, and take your gains with your other income minimal to fill up the space in the lower brackets.

... So now to the more challenging income side. I won't claim to have all the answers here, but I would imagine that through some combination of depreciation and income deferral in the family business, a lot of that income can be made to go away. It's also worth noting that a 50 percent marginal rate between federal, state and local along with the edu-vig could seriously shape my appetite for my day-job paycheck, especially if I already had 2.5M stashed and I knew my kids would be going to school for peanuts.

I don't know if this convinces anyone other than myself, but IMHO if you are well-to-do but not "Screw it, I don't care how much it costs" rich, and you have kids who might want to go to an expensive school, and you have the time to do it, you'd be crazy not to at least try to figure out an executable strategy to employ should the time come.

My personal thanks to BJK and Brody amongst others for fostering this topic.

psychtobe said:   What are the tax and fee/expense/cost consequences of doing that, though? What's the exit strategy? What kind of annuity rates can a 49 year old get? How does that compare to the expected returns of a diversified low cost tax-efficient investment portfolio?

I am not asking these questions to be difficult; only to understand without smoke and mirrors.

BJK - can you provide the thread or link (or a hint so I can find it)? As for the specific offer - perhaps in 7 years we should talk. My daughter just turned six. And I don't have $5,000,000 in countable assets.

I honest to goodness feel like I'm in a Kafka novel. Can someone please give me a straight answer?


If you're 49 and have a 6 y/o, you are very well-positioned to hop into (and four years later, out of) a vanguard variable annuity where you can maintain a well-diversified portfolio for a 0.6-ish percent expense ratio. No surrender period- if you don't like the lay of the land after filing your last FAFSA, withdraw, pay your taxes on your gains, and go back into taxable space. Or wait until you're retired and do it stepwise in the lower brackets.

If you tranfer via UTMA to kids to lower your EFC, what happens to the kid's expected contribution? I thought their expected % is higher than yours?

DrDubious said:   psychtobe said:   What are the tax and fee/expense/cost consequences of doing that, though? What's the exit strategy? What kind of annuity rates can a 49 year old get? How does that compare to the expected returns of a diversified low cost tax-efficient investment portfolio?

I am not asking these questions to be difficult; only to understand without smoke and mirrors.

BJK - can you provide the thread or link (or a hint so I can find it)? As for the specific offer - perhaps in 7 years we should talk. My daughter just turned six. And I don't have $5,000,000 in countable assets.

I honest to goodness feel like I'm in a Kafka novel. Can someone please give me a straight answer?


If you're 49 and have a 6 y/o, you are very well-positioned to hop into (and four years later, out of) a vanguard variable annuity where you can maintain a well-diversified portfolio for a 0.6-ish percent expense ratio. No surrender period- if you don't like the lay of the land after filing your last FAFSA, withdraw, pay your taxes on your gains, and go back into taxable space. Or wait until you're retired and do it stepwise in the lower brackets.
im only 39 now, but perhaps this still works when I'm 49 and child is sixteen?

Potentially yes, but not as optimally. You'll be paying a higher ER than you otherwise would be for longer. There have been a few threads at bogleheads analyzing the increased cost vs. Tax deferral question, where in general, the longer you hang onto tax-inefficient assets in a VA, the more favorable the tax deferral becomes. However that ignores the FAFSA dodge, where you care less about deferral and more about the increased cost you pay in order to shield all your assets from taking a 20% EFC hit over 4 years regardless of tax efficiency. The perfect scenario has you turn 59.5 the same year you file your last fafsa so you only pay the extra 0.4 to 0.5-ish % extra expense for 4 years. In your case, it would be more like 10 until you could get out cleanly.

The problem is the need to convert deferred capital gains to realized capital gains in order to move the assets into a VA. Even today the taxes on my gains would be substantial. So I can see running that show with new money but it still doesn't get rid of the old.

psychtobe said:   What are the tax and fee/expense/cost consequences of doing that, though? What's the exit strategy? What kind of annuity rates can a 49 year old get? How does that compare to the expected returns of a diversified low cost tax-efficient investment portfolio?

I am not asking these questions to be difficult; only to understand without smoke and mirrors.

BJK - can you provide the thread or link (or a hint so I can find it)? As for the specific offer - perhaps in 7 years we should talk. My daughter just turned six. And I don't have $5,000,000 in countable assets.

I honest to goodness feel like I'm in a Kafka novel. Can someone please give me a straight answer?


First of all, you should feel like you are in a Kafka novel.

The straight answer is much of the financial aid system makes absolutely no sense or is counter intuitive.

For instance, how could something so obviously beneficial as a 529 actually cause college to cost more -- and certainly not less -- for so many families? Why is is better in some situations, to forgo a 529's upfront tax advantages? It just doesn't make any sense. It defies logic. But it is true. 529s might be-- for some families in some situations -- the most Kafka-esque vehicle of all.

Or for another instance, how could something so obviously horrendous as cash value insurance products actually be good for some families in some situations? Again it defies logic. And there are easily dozens of threads over the past decade where I have thrown up all over those products. But when it comes to financial aid, up is down. And annuities and annuity-like vehicles can be advantageous for some families in some situations.

Or how could it be that in some situations (FAFSA) having a paid off mortgage could be a very good thing while in other situations (CSS Profile, depending on the school) having a paid off mortgage could be a very bad thing?

And while there are several different strategies one can employ, there is no one size fits all approach.

And while the strategies/tactics individually are simple, as you yourself so correctly point out, they can either be complicated in aggregate, or complicated to implement or complicated in terms of their longer term consequences.

And, to make it even more complicated, the optimal mix of strategies depends to some degree on the investment climate. Right now we are essential in an environment where zero risk fixed incomes are paying essential zero interest. So that skews the equation.

Even then, an effective strategy depends on ones risk tolerance ... whether it be for investment risk, complicated schemes, semi-savory methods, etc etc. And on the effort one feels is appropriate to put forth. Even for two families of identical means and children, the strategies will be different if only because of this.

And finally, any of the strategies depends -- as does any investment -- on each person's view of what the future will look like. That's why I encourage people to not get too caught up in this until their eldest child reaches 7th or 8th grade. By that point there's typically a decent sum put away, but not so much that can't be rationalized over the next 4-5 years. And college will be close enough on the horizon that one can get a reasonably decent fix on how financial aid will be calculated, what college will cost, what college Suzy might get into, etc etc.

As I have said in several of these threads, the cynical part of me might say the smoke and mirrors in the current financial aid scheme is there intentionally to favor the rich at the expense of the poor. While that might be too harsh a generalization, there is enough reason to believe that to make me ill.



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