529s and the FAFSA

529s are a source of a bit of confusion when it comes to filling out the FAFSA. Here are some common issues:

529s for multiple children: All of the parents’ 529s get reported on the FAFSA as parent assets. Let’s say you have 3 children, ages 17 (the one whose FAFSA you’re completing), 15, and 12, and you have a 529 account for each with balances of $12,000, $10,000 and $7,000. You would report $29,000 in 529 assets.

529s owned by someone else: You only report 529s owned by the parent on the FAFSA as parent assets. That is to say, you do not report grandparent-owned 529s or 529s owned by an ex-spouse who is not the custodial parent for FAFSA purposes. Instead, when funds are withdrawn from non-parental 529s, they are reported as student income.

529 withdrawals: The huge benefit of parent-owned 529s is that the withdrawals do not need to be reported as income on the FAFSA, regardless of gain within the account. However, withdrawals from a non-parent 529– including that of an ex-spouse parent who’s not the custodial parent on the FAFSA– are reported as student income for the year in which the withdrawals occur.

UTMA/UGMA accounts: These are reported as student assets. However, they can be converted to 529s to be reported as parent assets instead. When doing so, be careful if you’re in a FAFSA income year: you will be required to sell the investments in the UTMA/UGMA, which is likely to trigger capital gains and may put the student over the FAFSA student income protection allowance ($6,660 this year). So, if a current high school senior has an UTMA worth $15,000 with a cost basis of $7,500, the UTMA increases EFC by $3,000. If the family converted it to a 529 this year, that would reduce its EFC impact to at most $846. But next year’s FAFSA would have the student reporting an additional $7,500 of income. Assuming the student made another $1,500 from a part-time job, the UTMA conversion would increase next year’s EFC by almost $1,200.  You still come out ahead, but know that these conversions can result in future EFC surprises.

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