Our daughter is about to start college and the first bill is due. I have a somewhat complex (but probably pretty typical) situation and I'm trying to figure out the best way to have funds removed from multiple 529 plans (held by different people), so as to minimize any extra work at tax time for all parties involved.
The specific numbers shouldn't matter, so I'll make up some: - Annual tuition, room, board: $41,000 - Scholarship: $20,000 - Federal loan (in her name): $5,000 ========= $16,000 / 2 semesters ========= $8000 due now
Now, let's say that her grandfather (my father) has $8,000 in a 529 he set up for our daughter.
Question 1: What's the best way for my father to remove the funds? Based on my Googling, I've read multiple things. Having the 529 plan cut a check payable to the school seems to be pretty common, but some of what I read online suggested that it might be even better (easier at tax time?) if he simply has a check cut payable to my daughter.
Also, let's say I have $10,000 in a 529 that my wife and I set up for her. Even though my father's $8,000 will completely satisfy the first bill, It is my understanding is that we could still take out our entire $10,000 from our 529 plan because we don't need to account for her scholarship when determining funds that can be reimbursed (there's probably a better way for me to say that). So,
Question 2: If I did decide to also take the $10,000 out at this time, what would be the best way to do that? In this case, it wouldn't seem to make sense to send it to the school (where it would be effectively treated as a credit or overpayment that could then be cut as a check to be sent back to our daughter), unless I needed to "filter" it through them so that it's seen as a legitimate college expense.
Why not just leave our $10,000 in her 529 for now, and worry about removing it next semester? Well, that's probably what we are going to do. But I'd still like to know what all of our options are, and know which, if any, approaches cause more/less tax-time complexity.
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posted: Aug. 15, 2016 @ 7:18a
Why would she be taking out a loan when there are 529 funds available?
Just pay the school out of the 529s as the bills become due. Why do you describe this as "complicated"?
posted: Aug. 15, 2016 @ 7:27a
hipnetic said: Also, let's say I have $10,000 in a 529 that my wife and I set up for her. Even though my father's $8,000 will completely satisfy the first bill, It is my understanding is that we could still take out our entire $10,000 from our 529 plan because we don't need to account for her scholarship when determining funds that can be reimbursed (there's probably a better way for me to say that).
I'm not so sure about that. I believe qualified education expenses are reduced by any expenses paid on her behalf. You can't take the tax benefit of using the funds for education expenses that you didn't actually incur.
posted: Aug. 15, 2016 @ 2:47p
The only 529 plan we had for our son was funded by us. I had the funds transferred to my bank account.
I could be wrong, but I don't think you can take out more than you have expenses to show for it. Well yes, they will disburse any amount you ask for.
You can take out any amount you want from the 529. It is a matter of what you pay in tax and penalty.
To the extent that your 529 distribution exceeds your qualified educational expenses (after deduction for scholarship etc.), you will certainly pay tax on it (actually on the earnings part of it).
There is also nominally a 10% penalty on this excess amount. I believe this is where the scholarships come --- you don't pay a penalty for the part that is covered by a scholarship.
posted: Aug. 15, 2016 @ 6:42p
ARe these totally made up numbers?
Is there more in the 529's than cited? Or are you going to pretty much deplete them for 1 years worth of school expenses?
I'm asking because 529's from grandparents can have a bigger negative impact on financial aid eligibility. So you might be better served in depleting the 529 funds in your account first then using the grandparents money for the senior year only.
posted: Aug. 15, 2016 @ 7:49p
Right, as jerosen stated-
You can feel free to pull out money from your wife's 529 at any time, and it won't affect financial aid decisions. 529 money that you/your wife own counts as "parental assets," which have relatively less of an effect on your financial aid package. Do keep in mind that you can't double dip with the education tax credits and 529 money- if tuition is, say, $8,000, you might want to pull out $4,000 from your wife's 529 and pay $4,000 out of pocket, getting a $2,500 tax credit from the latter (there is an income phaseout for this).
The one owned by your father, however, is more complicated. On your current FAFSA, it doesn't count in the aid decision at all. As soon as money is pulled out, however, it counts as student income, which has a major effect on financial aid. Typically you don't want to pull from a grandparent's 529 too early- for example, if the student takes the typical 4 years and graduates in May/June, you don't want to pull money out before 2nd semester (spring) of Junior year (the FAFSA filed that spring will look at the previous year's income, and you won't have to file one 2nd semester of Senior year, so they'll never see it reported). If you pull out money earlier, then it will get reported on a FAFSA at some point and that will cost you financial aid. None of this is relevant, of course, if either a) the student doesn't qualify for aid or if b) the student is going to a private university, since most private universities have an additional form to fill out that will specifically ask about grandparent owned 529s, so you can't hide that money as you can with public colleges.
Senior Member - 3K
posted: Aug. 16, 2016 @ 12:00p
$41,000 per year?..... why not go to a community college for a couple of years and save $80,000?
posted: Aug. 16, 2016 @ 12:41p
jomarrod said: $41,000 per year?..... why not go to a community college for a couple of years and save $80,000?
"The specific numbers shouldn't matter, so I'll make up some:"
Senior Member - 1K
posted: Aug. 16, 2016 @ 2:28p
jerosen said: jomarrod said: $41,000 per year?..... why not go to a community college for a couple of years and save $80,000?
"The specific numbers shouldn't matter, so I'll make up some:"
Ok then, 16 inches long. You know, since actual numbers don't matter.
posted: Aug. 17, 2016 @ 9:10a
jomarrod said: $41,000 per year?..... why not go to a community college for a couple of years and save $80,000? It's actually $21k after the scholarship, which isn't bad considering it includes room and board. Also, community college usually isn't free. With community college you have the distraction's of home.
posted: Aug. 20, 2016 @ 11:13a
we have three kids, and have just started drawing from middle kids' 529.
For the record, Fidelity 529 plan, for our state. We also have some investments outside the 529 at Fidelity.
Kid #1 is going to a private school in-state. We were told when she started that the school couldn't withdraw directly from the 529. So the procedure we set up was... once I know the amount of the bill, I get on the telephone, and ask for a withdrawl from the 529 to our joint (wife and I) Cash Management Account. I then tell the school to withdraw from there. For some weird reason, kid #1's bill includes books and materials (electronic books).
Kid #2 has just started attending the state school up the road. I'm using the same procedure for him.
The Fidelity Cash Management account comes with a check book...so I can give the universities a bank routing number and an account number from which they draw the funds.
There's a new rule that computers are now considered legitimate expenses (not the case when kid #1 got her computer). So, when we bought a computer for kid #2, it was the only item on the bill. I called the Fidelity 529 people, told them I wanted to withdraw such and such figure, and they put it in the Cash Management account. In this case, I chose to invest that cash into one of our Fidelity mutual funds, and withdrew the same amount from a savings account at our credit union. That savings account is a college savings account I occasionally sweep to fidelity to invest either in the 529s, or into mutual funds.
My state offers a tax deduction for monies deposited into a 529. For the past couple of years, we've been putting the most allowed for a deduction, but no more.
As far as I can tell, 529s are managed on the honor system -- I told Fidelity I was withdrawing the money for a computer I purchased, but I didn't show them anything. They advised me I would need to hold onto documentation in case the IRS audits.
One other factoid... both of my college kids have scholarships that pay about 40% of each semester's bill. I've been fortunate to be able to put enough into the 529s that I now have to worry about what to do with leftover money at the other end. I found out recently that I can withdraw from the 529s, penalty free, based on the scholarships. So lets say each of my kids get 6000 in scholarships each semester. The withdrawl has to occur in the same calendar year as the bill (or so Fidelity has advised me). So, if I choose, I can withdraw up to $18,000 this year penalty free (but not tax free) from the 529s to offset $18,000 in scholarships my children have earned.
posted: Aug. 22, 2016 @ 7:30a
Sorry for just now getting back to this thread. Let me clarify some things:
1) The numbers I posted are not exact, but are probably not that far off from the real numbers. 2) Yes, we will be depleting my father's 529 to cover the first semester's tuition bill. 3) We make too much money to qualify for any financial aid and/or education-related tax deductions. The only "aid" we'll be getting is the unsubsidized Stafford loan. I thought long and hard about whether to have our daughter take out the Stafford loans (since we don't *need* the money right now and I hate to throw away money where the loan interest is concerned), but ultimately decided that she should take the loans because: a) I want her to have some skin in the game. b) Who knows what our financial situation might be next year or the year after that (e.g., my wife and I could lose our jobs). c) If she goes down the path of becoming a teacher in a low income school district (unlikely, but not impossible), she could eventually have a large chunk of the loans forgiven. d) I've heard that some employers are starting to pay part/all of a new employee's student loans. Again, I doubt this will apply to my daughter for the career path she's currently considering, but who knows. e) Assuming she does well and graduates and doesn't go down a career path where her loans could be forgiven or paid by someone else, we'll likely give her further financial help in paying them off entirely and quickly to minimize the accrued interest impact. 4) Yes, I *am* allowed to withdraw money beyond what the actual bill is for because of her scholarship. The check would be paid to my daughter and any earnings on the 529 would be taxable at the federal rate, but there would be no additional 10% penalty. Because I just opened the account earlier this year (the money is in a "high-yield" type of savings fund) and because my daughter just recently started a minimum-wage part-time job working just a few hours a week, she probably wouldn't end up paying any taxes on it at all. That said, I'm probably going to wait until next semester's bill comes due before I bother withdrawing from it. This account has about $10,000 in it, which was the maximum amount I could contribute to get the CT state tax deduction. I plan to continue to put $10,000/year into it to get this state tax deduction, and will withdraw from it every year to pay the bills. This will effectively keep this account in a depleted state most of the time. 5) This additional amounts due will be paid by me out of other savings.
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