Move taxable to 529 for FAFSA benefits?

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investingn00b
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Move taxable to 529 for FAFSA benefits?

Post by investingn00b » Sat Jun 10, 2017 4:44 pm

Excuse me if this question is extremely ignorant, but I've been having a hard time finding an answer. I currently have about $20k in a taxable account, and I'm about to attend college a bit later in life. As far as I know, taxable investment accounts can greatly reduce the amount of financial aid (PELL Grants) you receive. Could I move the money from the taxable account to a 529 for myself, and would that possibly allow me to receive more in financial aid?

mcraepat9
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Re: Move taxable to 529 for FAFSA benefits?

Post by mcraepat9 » Sat Jun 10, 2017 4:53 pm

Funds in 529 and taxable accounts are treated equally for FAFSA purposes. Moving funds to a tax-advantaged retirement account would be beneficial from a FAFSA perspective, as funds contained in those are not included in the universe of assets that are considered available for paying tuition.
Amateur investors are not cool-headed logicians.

investingn00b
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Re: Move taxable to 529 for FAFSA benefits?

Post by investingn00b » Sat Jun 10, 2017 5:03 pm

Great, thanks for the info. For some reason I thought 529s didn't count (or at least as heavily as taxable accounts) for FAFSA purposes. My tax advantaged accounts are already maxed out, at least until next year.

Kind of makes me wish I wasn't such a stickler in saving so much, because I could've spent that $20k instead of putting it in a taxable account, and I might've received it back in PELL grants just as well.

I guess my question is now, might I be better off spending the money in my taxable account some other way in order to receive more financial aid, or would that be a fruitless endeavor since cashing out the account would raise my income for the year?

NotWhoYouThink
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Re: Move taxable to 529 for FAFSA benefits?

Post by NotWhoYouThink » Sat Jun 10, 2017 5:07 pm

Why don't you use the money in your taxable account to pay for college? Isn't that what it's for?

Without more info, I have no clue whether you will be eligible for financial aid, but most are not eligible for enough to fund a degree program. And you don't want to take out loans if you can help it. So use the money you've saved to pay for college. And don't worry that you are missing out on benefits that some other people got because they are poorer. Your aren't. Most of the benefits you hear about are myth. Or loans.

investingn00b
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Re: Move taxable to 529 for FAFSA benefits?

Post by investingn00b » Sat Jun 10, 2017 5:15 pm

NotWhoYouThink wrote:Why don't you use the money in your taxable account to pay for college? Isn't that what it's for?

Without more info, I have no clue whether you will be eligible for financial aid, but most are not eligible for enough to fund a degree program. And you don't want to take out loans if you can help it. So use the money you've saved to pay for college. And don't worry that you are missing out on benefits that some other people got because they are poorer. Your aren't. Most of the benefits you hear about are myth. Or loans.
Haha yes, true, I could just use the taxable account to pay for college. I'm active duty military, so I get $4,500 for college per year. One year before I built my taxable account, I received a nice PELL Grant that allowed me to take even more classes that year. I was hoping to get another one but it seems I've saved a bit too much to qualify.

At this point it seems that I'm probably better off using my taxable to pay for college rather than, say, using it to upgrade my car in hopes that after eliminating the account I'd qualify for more grants for college.

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Sammy_M
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Re: Move taxable to 529 for FAFSA benefits?

Post by Sammy_M » Sat Jun 10, 2017 5:21 pm

mcraepat9 wrote:Funds in 529 and taxable accounts are treated equally for FAFSA purposes.
I'm not sure that is correct for student owned accounts. For student owned taxable, I think the expected contribution is 20%. For student owned 529s, I think it is treated as if owned by the parent, and thus has a lower expected contribution percentage (5.64% I think). Not sure about whether it is considered income to the student when withdrawn like it would be for grandparent owned accounts.

mcraepat9
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Re: Move taxable to 529 for FAFSA benefits?

Post by mcraepat9 » Sat Jun 10, 2017 5:24 pm

Sammy_M wrote:
mcraepat9 wrote:Funds in 529 and taxable accounts are treated equally for FAFSA purposes.
I'm not sure that is correct for student owned accounts. For student owned taxable, I think the expected contribution is 20%. For student owned 529s, I think it is treated as if owned by the parent, and thus has a lower expected contribution percentage (5.64% I think).


This is only true if the parent owns the account and the student is the beneficiary.
Amateur investors are not cool-headed logicians.

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dogagility
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Re: Move taxable to 529 for FAFSA benefits?

Post by dogagility » Sat Jun 10, 2017 5:25 pm

Sorry if this sounds harsh but... hiding money so others (i.e. taxpayers) pay for your college expenses was never the intent of need-based government grant programs like Pell. Good for you in seeing the light.
Taking "risk" since 1995.

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Sammy_M
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Re: Move taxable to 529 for FAFSA benefits?

Post by Sammy_M » Sat Jun 10, 2017 5:27 pm

mcraepat9 wrote:This is only true if the parent owns the account and the student is the beneficiary.
http://www.savingforcollege.com/intro_t ... al-aid.php
Are assets counted on the Free Application for Federal Student Aid (FAFSA)?
Yes, but assets in accounts owned by a dependent student or one of their parents are considered parental assets on the FAFSA. When a school calculates the student's Expected Family Contribution (EFC), only a maximum of 5.64% of parental assets are counted. This is quite favorable compared to other student assets, which are counted at 20%. Higher EFC means less financial aid.
also goes on to say
How are distributions treated?
529 plan distributions receive favorable treatment. Qualified distributions from a student-owned or parent-owned 529 account to pay for this year's college expenses are not included in the "base-year income" that reduces next year's financial aid eligibility.
I think the OP is on the right track if he is a dependent. If not a dependent, not sure.
Last edited by Sammy_M on Sat Jun 10, 2017 5:30 pm, edited 1 time in total.

mcraepat9
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Re: Move taxable to 529 for FAFSA benefits?

Post by mcraepat9 » Sat Jun 10, 2017 5:30 pm

Sammy_M wrote:
mcraepat9 wrote:This is only true if the parent owns the account and the student is the beneficiary.
http://www.savingforcollege.com/intro_t ... al-aid.php
Are assets counted on the Free Application for Federal Student Aid (FAFSA)?
Yes, but assets in accounts owned by a dependent student or one of their parents are considered parental assets on the FAFSA. When a school calculates the student's Expected Family Contribution (EFC), only a maximum of 5.64% of parental assets are counted. This is quite favorable compared to other student assets, which are counted at 20%. Higher EFC means less financial aid.
I stand corrected -- is OP a dependent student?
Amateur investors are not cool-headed logicians.

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The529guy
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Re: Move taxable to 529 for FAFSA benefits?

Post by The529guy » Sat Jun 10, 2017 5:32 pm

mcraepat9 wrote:
Sammy_M wrote:
mcraepat9 wrote:This is only true if the parent owns the account and the student is the beneficiary.
http://www.savingforcollege.com/intro_t ... al-aid.php
Are assets counted on the Free Application for Federal Student Aid (FAFSA)?
Yes, but assets in accounts owned by a dependent student or one of their parents are considered parental assets on the FAFSA. When a school calculates the student's Expected Family Contribution (EFC), only a maximum of 5.64% of parental assets are counted. This is quite favorable compared to other student assets, which are counted at 20%. Higher EFC means less financial aid.
I stand corrected -- is OP a dependent student?
Hey folks, active duty military personnel are considered independent for federal student aid purposes.

When I Fill Out the FAFSA… Am I Dependent or Independent?

I started to write a snarky remark here, but stopped. Let's be real for a minute. Does anyone really think that an adult who signed up to serve in the armed forces would be required to report his or her parents' finances as a "dependent" for FAFSA?

As Gob Bluth would say, "Come on!" :happy

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teen persuasion
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Re: Move taxable to 529 for FAFSA benefits?

Post by teen persuasion » Sat Jun 10, 2017 9:14 pm

OP, can you file 1040EZ or A? Is your AGI under $50k? You could be eligible for the Simplified Needs Test on the FAFSA, which would ignore assets.

Google "EFC formulas 2017-18" to get the pdf of the relevant formulas. As you are military, you are an independent student. Being married and having other dependents can affect which formula set you will go thru (either B or C).

Putting more income in pre-tax retirement accounts can lower your AGI if you are a bit over $50k. The test for the Simplified Needs Test is before contributions to retirement accounts are added back to income.

Remember that you can only get PELL for 4 years, and I believe only for undergrad.

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teen persuasion
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Re: Move taxable to 529 for FAFSA benefits?

Post by teen persuasion » Sat Jun 10, 2017 9:30 pm

More thoughts: if you will be attending this fall, the FAFSA applications were done beginning last October, using tax info from 2015. If next year, you will complete the FAFSA in October 2017 with 2016 tax info. So those are already fixed and cannot be changed thru retirement contributions. The asset reporting, however, is as of the day you apply. So if you do need to report assets, some judicious timing of payments can make some difference. Pay all upcoming bills to lower your asset balance, and/or choose to apply before receiving a large paycheck, or when your balances are relatively low. For example, I make sure to pay the school tax bill, prebuy our winter supply of heating oil, and pay off our monthly credit card balance immediately BEFORE doing FAFSA applications for our current college kids. Those 3 things are easily a $6k difference. I may also choose to fund Roth IRAs for DH and myself before applying, moving another $13k out of regular assets.

investingn00b
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Re: Move taxable to 529 for FAFSA benefits?

Post by investingn00b » Sun Jun 11, 2017 9:48 am

Teen persuasion, thanks for all of that great info. You've given me some things to research. I'll probably be back with new questions in a couple days.

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teen persuasion
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Re: Move taxable to 529 for FAFSA benefits?

Post by teen persuasion » Sun Jun 11, 2017 11:08 am

Also Google "paper FAFSA" to reference the formula inputs (e.g., "line 96f"). You will be applying online, but that format is Q&A, not line by line, and not labeled that I've seen.

Some of the amounts asked for are a bit ambiguous, like "your income". Is that gross income, AGI, taxable income, etc.? By comparing what the paper form line asks, to how the input is used in the calculations, you can see that in one section they ask for income to calculate FICA withheld. So AGI with lots of traditional 401k contributions would be incorrect to enter here - FICA is withheld on retirement account contributions.

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