Advice with 529 for a single mom

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EnjoyIt
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Advice with 529 for a single mom

Post by EnjoyIt » Sat Feb 09, 2019 12:20 am

Can someone please help me figure out the best path for this scenario:

Single mom with 1 child ready to go to college.
Salary is about $50k/yr and she fully maxes the 401k every year
A family member has $100k in a 529 who want to help pay for college.

How does the mom use the 529 but still have some options with financial aid or does having the 529 preclude her from getting any financial aid at all?

EDIT: I understand that the beneficiary can transfer portions of a 529 to the child every year and make sure that portion is used up prior to filling the FAFSA for the following year. Does that work?
Last edited by EnjoyIt on Sat Feb 09, 2019 3:00 am, edited 1 time in total.

Flyer24
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Re: Advice with 529 for a single mom

Post by Flyer24 » Sat Feb 09, 2019 12:53 am

From the Forbes site

“ The 529 is not counted as an asset on the FAFSA form, but like non-custodial parents, withdrawals from the 529 plan are counted as student non-taxable income and up to 50% of the value of the withdrawal could impact financial aid. If you are a relative or family friend with a 529 plan for a child, consider waiting until the child files their last FAFSA form to withdraw the funds from the 529 plan.”

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RickBoglehead
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Re: Advice with 529 for a single mom

Post by RickBoglehead » Sat Feb 09, 2019 7:23 am

I believe FAFSA looks back 2 years now, so a 529 can be used in Junior and senior years of college.
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markcoop
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Re: Advice with 529 for a single mom

Post by markcoop » Sat Feb 09, 2019 8:43 am

The big point mentioned above is that withdrawals from a 529 from the relative will be considered nontaxable income (any income hurts) and therefore would be bad for financial aid. As such, it would be best not to use that 529 till second semester sophomore year. For example, if the child started college this fall (school year 2019-2020), then you could start using the 529 starting Jan 1, 2021 (sophomore year school year is 2020-2021 and the second semester would start in Jan of 2021). This is because of the prior prior year for figuring out financial aid. So tax returns from 2017-2020 would be used in the example above for the 4 years of college.
Mark

KlangFool
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Re: Advice with 529 for a single mom

Post by KlangFool » Sat Feb 09, 2019 11:02 am

markcoop wrote:
Sat Feb 09, 2019 8:43 am
The big point mentioned above is that withdrawals from a 529 from the relative will be considered nontaxable income (any income hurts) and therefore would be bad for financial aid. As such, it would be best not to use that 529 till second semester sophomore year. For example, if the child started college this fall (school year 2019-2020), then you could start using the 529 starting Jan 1, 2021 (sophomore year school year is 2020-2021 and the second semester would start in Jan of 2021). This is because of the prior prior year for figuring out financial aid. So tax returns from 2017-2020 would be used in the example above for the 4 years of college.
markcoop,

Can the relative withdraw from their 529 and pay the kid's tuition directly in order to avoid this problem?

KlangFool

johnny
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Re: Advice with 529 for a single mom

Post by johnny » Sat Feb 09, 2019 11:55 am

One thing to keep in mind is the American opportunity tax credit for which you will likely qualify given your income level. 529 distributions can offset your eligibility for the credit, as describe here

https://www.forbes.com/sites/troyonink/ ... df3ac27d1c

Good luck with the college planning!

markcoop
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Re: Advice with 529 for a single mom

Post by markcoop » Sat Feb 09, 2019 1:58 pm

KlangFool wrote:
Sat Feb 09, 2019 11:02 am
markcoop wrote:
Sat Feb 09, 2019 8:43 am
The big point mentioned above is that withdrawals from a 529 from the relative will be considered nontaxable income (any income hurts) and therefore would be bad for financial aid. As such, it would be best not to use that 529 till second semester sophomore year. For example, if the child started college this fall (school year 2019-2020), then you could start using the 529 starting Jan 1, 2021 (sophomore year school year is 2020-2021 and the second semester would start in Jan of 2021). This is because of the prior prior year for figuring out financial aid. So tax returns from 2017-2020 would be used in the example above for the 4 years of college.
markcoop,

Can the relative withdraw from their 529 and pay the kid's tuition directly in order to avoid this problem?

KlangFool
Not really sure if it counts as untaxed income, but I don't believe it solves the financial aid situation. From Savings from college.com (talks about a grandchild, but I think it's any relative):

"Pay tuition directly to your grandchild’s school
Pros:
- Under a special tax-code exemption, the amount of tuition a grandparent pays the school will not be subject to gift tax.
- It’s a simple way to pay for your grandchild’s college.

Cons:
- There will be negative effects on the student’s financial aid eligibility. Financial aid formulas may treat the direct payment as a dollar-for-dollar reduction in aid eligibility for the following year. Or, the tuition payment will be treated as student income on the FAFSA, which will reduce aid eligibility by 50% of the amount paid (so a $10,000 tuition payment will reduce eligibility by $5,000).
- The gift-tax exclusion only applies to tuition and does not include books, supplies and room and board."

https://www.savingforcollege.com/articl ... or-college
Mark

KlangFool
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Re: Advice with 529 for a single mom

Post by KlangFool » Sat Feb 09, 2019 1:59 pm

markcoop wrote:
Sat Feb 09, 2019 1:58 pm
KlangFool wrote:
Sat Feb 09, 2019 11:02 am
markcoop wrote:
Sat Feb 09, 2019 8:43 am
The big point mentioned above is that withdrawals from a 529 from the relative will be considered nontaxable income (any income hurts) and therefore would be bad for financial aid. As such, it would be best not to use that 529 till second semester sophomore year. For example, if the child started college this fall (school year 2019-2020), then you could start using the 529 starting Jan 1, 2021 (sophomore year school year is 2020-2021 and the second semester would start in Jan of 2021). This is because of the prior prior year for figuring out financial aid. So tax returns from 2017-2020 would be used in the example above for the 4 years of college.
markcoop,

Can the relative withdraw from their 529 and pay the kid's tuition directly in order to avoid this problem?

KlangFool
Not really sure if it counts as untaxed income, but I don't believe it solves the financial aid situation. From Savings from college.com (talks about a grandchild, but I think it's any relative):

"Pay tuition directly to your grandchild’s school
Pros:
- Under a special tax-code exemption, the amount of tuition a grandparent pays the school will not be subject to gift tax.
- It’s a simple way to pay for your grandchild’s college.

Cons:
- There will be negative effects on the student’s financial aid eligibility. Financial aid formulas may treat the direct payment as a dollar-for-dollar reduction in aid eligibility for the following year. Or, the tuition payment will be treated as student income on the FAFSA, which will reduce aid eligibility by 50% of the amount paid (so a $10,000 tuition payment will reduce eligibility by $5,000).
- The gift-tax exclusion only applies to tuition and does not include books, supplies and room and board."

https://www.savingforcollege.com/articl ... or-college
Thanks for the information.

KlangFool

DIFAR31
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Re: Advice with 529 for a single mom

Post by DIFAR31 » Sat Feb 09, 2019 2:05 pm

KlangFool wrote:
Sat Feb 09, 2019 11:02 am
Can the relative withdraw from their 529 and pay the kid's tuition directly in order to avoid this problem?

KlangFool
No; this would still need to be reported on the student's FAFSA and Profile forms as "Money received, or paid on [the student's] behalf (e.g., bills), not reported elsewhere..." (this language is from the current FAFSA).

Topic Author
EnjoyIt
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Re: Advice with 529 for a single mom

Post by EnjoyIt » Sat Feb 09, 2019 5:01 pm

So what is the best solution? The $100k is enough to cover a large portion of the expected costs but not all of the cost.

livesoft
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Re: Advice with 529 for a single mom

Post by livesoft » Sat Feb 09, 2019 5:51 pm

Just get admitted to several colleges and apply for financial aid at all of them. Ignore the external 529 plan for now. Then, after seeing financial aid packages, come back and ask questions.
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miamivice
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Re: Advice with 529 for a single mom

Post by miamivice » Sat Feb 09, 2019 5:54 pm

I have to say that a single mom making $50k a year, but putting $20k a year into retirement, is living quite thrifty.

Topic Author
EnjoyIt
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Re: Advice with 529 for a single mom

Post by EnjoyIt » Sat Feb 09, 2019 6:35 pm

miamivice wrote:
Sat Feb 09, 2019 5:54 pm
I have to say that a single mom making $50k a year, but putting $20k a year into retirement, is living quite thrifty.
Her house is paid off, car is paid off, and no school debt, therefor her fixed expenses are pretty low. She has a very stable nursing job and appears to be living pretty comfortably.

DIFAR31
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Re: Advice with 529 for a single mom

Post by DIFAR31 » Sat Feb 09, 2019 9:21 pm

EnjoyIt wrote:
Sat Feb 09, 2019 5:01 pm
So what is the best solution? The $100k is enough to cover a large portion of the expected costs but not all of the cost.
The best solution to preserve need-based financial aid when a 529 not owned by the student or a parent is available has already been mentioned in this thread: wait until the spring semester of the student's sophomore year before using any funds from that 529, assuming the student is attending on a traditional academic calendar and will graduate in four years.

Topic Author
EnjoyIt
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Re: Advice with 529 for a single mom

Post by EnjoyIt » Sun Feb 10, 2019 12:05 am

DIFAR31 wrote:
Sat Feb 09, 2019 9:21 pm
EnjoyIt wrote:
Sat Feb 09, 2019 5:01 pm
So what is the best solution? The $100k is enough to cover a large portion of the expected costs but not all of the cost.
The best solution to preserve need-based financial aid when a 529 not owned by the student or a parent is available has already been mentioned in this thread: wait until the spring semester of the student's sophomore year before using any funds from that 529, assuming the student is attending on a traditional academic calendar and will graduate in four years.
But doesn't one need to file another FAFSA in the junior year as well? Maybe I am missing something, but how does this strategy help? Can you or someone else please explain?

DIFAR31
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Re: Advice with 529 for a single mom

Post by DIFAR31 » Sun Feb 10, 2019 12:21 am

EnjoyIt wrote:
Sun Feb 10, 2019 12:05 am
DIFAR31 wrote:
Sat Feb 09, 2019 9:21 pm
EnjoyIt wrote:
Sat Feb 09, 2019 5:01 pm
So what is the best solution? The $100k is enough to cover a large portion of the expected costs but not all of the cost.
The best solution to preserve need-based financial aid when a 529 not owned by the student or a parent is available has already been mentioned in this thread: wait until the spring semester of the student's sophomore year before using any funds from that 529, assuming the student is attending on a traditional academic calendar and will graduate in four years.
But doesn't one need to file another FAFSA in the junior year as well? Maybe I am missing something, but how does this strategy help? Can you or someone else please explain?
FAFSA (and Profile) uses income from the "prior-prior" year. A student starting college this coming fall (academic year 2019-2020) would use 2017 income for their first (freshman) academic year. Assuming a normal four year academic course of studies, this student would graduate in spring 2023. The last FAFSA, for academic year 2022-2023, would use income from the 2020 tax year. Any funds received by the student or paid on the student's behalf as early as January 2021 (the start of the sophomore spring semester) would not need to be reported on any financial aid document.

deskjockey
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Re: Advice with 529 for a single mom

Post by deskjockey » Sun Feb 10, 2019 3:29 am

There's another option available that is slightly more complex but allows for the use of the 529 in all years with little to no impact on financial aid. The mother should set up a 529 account of her own and fund it with the minimum to open an account (not sure what state she is in/wants to use, so this varies).

After the first FAFSA is filed and the child enrolls, have the owner of the 529 roll over enough money from his/her 529 to the mother's 529 to cover most of the first semester's bill, but no more. Repeat the rollovers for every semester's bill, ensuring there is only enough money left in the mother's 529 to keep the account open by 31 Dec of each year. By doing the rollovers to the mother's 529 and having the mother spend the funds, the money is not treated as income for the child and has no impact on financial aid, and by leaving very little money in the mother's 529 at the end of each year, the impact on financial aid is eliminated or minimized.

If you use this strategy, make sure to figure out if the relative will be on the hook for any recapture of state taxes by rolling over money, especially if the mother's 529 account is in a different state. You also want to check the 529 plan's rules to see if there is any minimum amount of time that money needs to be in the 529 before it can be disbursed without penalty. I know some plans place restrictions on how soon you can withdraw funds, but there are plenty that do not, including Utah and Virginia.

markcoop
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Re: Advice with 529 for a single mom

Post by markcoop » Sun Feb 10, 2019 10:20 am

deskjockey wrote:
Sun Feb 10, 2019 3:29 am
There's another option available that is slightly more complex but allows for the use of the 529 in all years with little to no impact on financial aid. The mother should set up a 529 account of her own and fund it with the minimum to open an account (not sure what state she is in/wants to use, so this varies).

After the first FAFSA is filed and the child enrolls, have the owner of the 529 roll over enough money from his/her 529 to the mother's 529 to cover most of the first semester's bill, but no more. Repeat the rollovers for every semester's bill, ensuring there is only enough money left in the mother's 529 to keep the account open by 31 Dec of each year. By doing the rollovers to the mother's 529 and having the mother spend the funds, the money is not treated as income for the child and has no impact on financial aid, and by leaving very little money in the mother's 529 at the end of each year, the impact on financial aid is eliminated or minimized.

If you use this strategy, make sure to figure out if the relative will be on the hook for any recapture of state taxes by rolling over money, especially if the mother's 529 account is in a different state. You also want to check the 529 plan's rules to see if there is any minimum amount of time that money needs to be in the 529 before it can be disbursed without penalty. I know some plans place restrictions on how soon you can withdraw funds, but there are plenty that do not, including Utah and Virginia.
I understand what you are saying, but I have not heard of this strategy before. It does make sense. One potential problem is doing multiple rollovers in a 12-month period.

From savingsforcollege.com:

"529 plans owners are limited to just one tax-free rollover in a 12-month period. This rule applies per beneficiary, not per plan. For example, let's say you moved to another state and you want to transfer the funds in your son's existing 529 plan to a plan in the state you reside in because they offer a tax deduction for contributions. But your father (the child's grandfather) also has a 529 plan with your son named as the beneficiary. You'll need to make sure that he hasn't done a rollover within the last 12 months, or your transaction will be considered a non-qualified withdrawal. The earnings portion of non-qualified withdrawals will be subject to income tax as well as a 10% penalty."

Here's the link with some other important points about rollovers:
https://www.savingforcollege.com/articl ... ver?page=1

OP: It is weird, but the years you need to be concerned about withdrawals from a non-parent/non-student owned 529 withdrawal are from Jan 1 of the sophomore year of high school through Jan 1 of the sophomore year of college. Those are the tax returns used for the 4 years of college. Obviously, no one is taking money out for college in high school, so only the first one and half years of college is affected.
Mark

deskjockey
Posts: 249
Joined: Sat Dec 03, 2016 11:15 am

Re: Advice with 529 for a single mom

Post by deskjockey » Sun Feb 10, 2019 10:54 am

markcoop wrote:
Sun Feb 10, 2019 10:20 am
deskjockey wrote:
Sun Feb 10, 2019 3:29 am
There's another option available that is slightly more complex but allows for the use of the 529 in all years with little to no impact on financial aid. The mother should set up a 529 account of her own and fund it with the minimum to open an account (not sure what state she is in/wants to use, so this varies).

After the first FAFSA is filed and the child enrolls, have the owner of the 529 roll over enough money from his/her 529 to the mother's 529 to cover most of the first semester's bill, but no more. Repeat the rollovers for every semester's bill, ensuring there is only enough money left in the mother's 529 to keep the account open by 31 Dec of each year. By doing the rollovers to the mother's 529 and having the mother spend the funds, the money is not treated as income for the child and has no impact on financial aid, and by leaving very little money in the mother's 529 at the end of each year, the impact on financial aid is eliminated or minimized.

If you use this strategy, make sure to figure out if the relative will be on the hook for any recapture of state taxes by rolling over money, especially if the mother's 529 account is in a different state. You also want to check the 529 plan's rules to see if there is any minimum amount of time that money needs to be in the 529 before it can be disbursed without penalty. I know some plans place restrictions on how soon you can withdraw funds, but there are plenty that do not, including Utah and Virginia.
I understand what you are saying, but I have not heard of this strategy before. It does make sense. One potential problem is doing multiple rollovers in a 12-month period.

From savingsforcollege.com:

"529 plans owners are limited to just one tax-free rollover in a 12-month period. This rule applies per beneficiary, not per plan. For example, let's say you moved to another state and you want to transfer the funds in your son's existing 529 plan to a plan in the state you reside in because they offer a tax deduction for contributions. But your father (the child's grandfather) also has a 529 plan with your son named as the beneficiary. You'll need to make sure that he hasn't done a rollover within the last 12 months, or your transaction will be considered a non-qualified withdrawal. The earnings portion of non-qualified withdrawals will be subject to income tax as well as a 10% penalty."

Here's the link with some other important points about rollovers:
https://www.savingforcollege.com/articl ... ver?page=1

OP: It is weird, but the years you need to be concerned about withdrawals from a non-parent/non-student owned 529 withdrawal are from Jan 1 of the sophomore year of high school through Jan 1 of the sophomore year of college. Those are the tax returns used for the 4 years of college. Obviously, no one is taking money out for college in high school, so only the first one and half years of college is affected.
Yes, there is a 12 month rule for rollovers, but you can change beneficiaries at any time, so OP's relative could alternate between having OP as the beneficiary and having OP's daughter, thus enabling one rollover every six months. OP would have to synchronize her beneficiary designation accordingly so as to not run afoul of the 12 month rule.

Alternately, if you don't want to mess with rollovers, just do one rollover every 12 months. Carefully choosing the date of the first rollover (make it sometime in the late spring before the kid goes to college) will set a usable schedule for the follow-on rollovers. The first rollover would only cover money for one semester; subsequent ones would cover two semesters, which might be a problem depending on when the school's bill for the spring semester is due.

EDIT: Sorry, in my original post I left out the bit about needing to alternate beneficiaries in order to make additional withdrawals.

Topic Author
EnjoyIt
Posts: 1712
Joined: Sun Dec 29, 2013 8:06 pm

Re: Advice with 529 for a single mom

Post by EnjoyIt » Sun Feb 10, 2019 1:29 pm

deskjockey wrote:
Sun Feb 10, 2019 10:54 am
markcoop wrote:
Sun Feb 10, 2019 10:20 am
deskjockey wrote:
Sun Feb 10, 2019 3:29 am
There's another option available that is slightly more complex but allows for the use of the 529 in all years with little to no impact on financial aid. The mother should set up a 529 account of her own and fund it with the minimum to open an account (not sure what state she is in/wants to use, so this varies).

After the first FAFSA is filed and the child enrolls, have the owner of the 529 roll over enough money from his/her 529 to the mother's 529 to cover most of the first semester's bill, but no more. Repeat the rollovers for every semester's bill, ensuring there is only enough money left in the mother's 529 to keep the account open by 31 Dec of each year. By doing the rollovers to the mother's 529 and having the mother spend the funds, the money is not treated as income for the child and has no impact on financial aid, and by leaving very little money in the mother's 529 at the end of each year, the impact on financial aid is eliminated or minimized.

If you use this strategy, make sure to figure out if the relative will be on the hook for any recapture of state taxes by rolling over money, especially if the mother's 529 account is in a different state. You also want to check the 529 plan's rules to see if there is any minimum amount of time that money needs to be in the 529 before it can be disbursed without penalty. I know some plans place restrictions on how soon you can withdraw funds, but there are plenty that do not, including Utah and Virginia.
I understand what you are saying, but I have not heard of this strategy before. It does make sense. One potential problem is doing multiple rollovers in a 12-month period.

From savingsforcollege.com:

"529 plans owners are limited to just one tax-free rollover in a 12-month period. This rule applies per beneficiary, not per plan. For example, let's say you moved to another state and you want to transfer the funds in your son's existing 529 plan to a plan in the state you reside in because they offer a tax deduction for contributions. But your father (the child's grandfather) also has a 529 plan with your son named as the beneficiary. You'll need to make sure that he hasn't done a rollover within the last 12 months, or your transaction will be considered a non-qualified withdrawal. The earnings portion of non-qualified withdrawals will be subject to income tax as well as a 10% penalty."

Here's the link with some other important points about rollovers:
https://www.savingforcollege.com/articl ... ver?page=1

OP: It is weird, but the years you need to be concerned about withdrawals from a non-parent/non-student owned 529 withdrawal are from Jan 1 of the sophomore year of high school through Jan 1 of the sophomore year of college. Those are the tax returns used for the 4 years of college. Obviously, no one is taking money out for college in high school, so only the first one and half years of college is affected.
Yes, there is a 12 month rule for rollovers, but you can change beneficiaries at any time, so OP's relative could alternate between having OP as the beneficiary and having OP's daughter, thus enabling one rollover every six months. OP would have to synchronize her beneficiary designation accordingly so as to not run afoul of the 12 month rule.

Alternately, if you don't want to mess with rollovers, just do one rollover every 12 months. Carefully choosing the date of the first rollover (make it sometime in the late spring before the kid goes to college) will set a usable schedule for the follow-on rollovers. The first rollover would only cover money for one semester; subsequent ones would cover two semesters, which might be a problem depending on when the school's bill for the spring semester is due.

EDIT: Sorry, in my original post I left out the bit about needing to alternate beneficiaries in order to make additional withdrawals.
Wow, that is amazing advice.
That means that a person can split their 529 in half the year before college starts. 50% to beneficiary and 50% to beneficiaries spouse. Then every just enough money is transferred to the mom paying for college with the beneficiaries taking turns every semester.

Does that sound about right?
Has anyone reading this successfully perform this type of strategy?

deskjockey
Posts: 249
Joined: Sat Dec 03, 2016 11:15 am

Re: Advice with 529 for a single mom

Post by deskjockey » Sun Feb 10, 2019 1:54 pm

EnjoyIt wrote:
Sun Feb 10, 2019 1:29 pm

Wow, that is amazing advice.
That means that a person can split their 529 in half the year before college starts. 50% to beneficiary and 50% to beneficiaries spouse. Then every just enough money is transferred to the mom paying for college with the beneficiaries taking turns every semester.

Does that sound about right?
Has anyone reading this successfully perform this type of strategy?
There's no need to split it if it is in one account. All you do is simply file a change of beneficiary form a few weeks/months before each rollover. So if you have $100k in one 529 that has Suzie as the beneficiary, after you do the first rollover, you file the forms to switch the beneficiary to her mom, Amanda. You also switch the beneficiary of the recipient 529 (the one Amanda owns) to Amanda. Then you do the rollover, which doesn't run afoul of the rules, since it is for a different beneficiary than the previous one. Then you switch the beneficiary for both accounts back to Suzie. Rinse, repeat. It's a fair amount of paperwork and you need to keep two rollover schedules straight to avoid running afoul of the rules, but it accomplishes what the OP needs done.

Topic Author
EnjoyIt
Posts: 1712
Joined: Sun Dec 29, 2013 8:06 pm

Re: Advice with 529 for a single mom

Post by EnjoyIt » Sun Feb 10, 2019 2:33 pm

deskjockey wrote:
Sun Feb 10, 2019 1:54 pm
EnjoyIt wrote:
Sun Feb 10, 2019 1:29 pm

Wow, that is amazing advice.
That means that a person can split their 529 in half the year before college starts. 50% to beneficiary and 50% to beneficiaries spouse. Then every just enough money is transferred to the mom paying for college with the beneficiaries taking turns every semester.

Does that sound about right?
Has anyone reading this successfully perform this type of strategy?
There's no need to split it if it is in one account. All you do is simply file a change of beneficiary form a few weeks/months before each rollover. So if you have $100k in one 529 that has Suzie as the beneficiary, after you do the first rollover, you file the forms to switch the beneficiary to her mom, Amanda. You also switch the beneficiary of the recipient 529 (the one Amanda owns) to Amanda. Then you do the rollover, which doesn't run afoul of the rules, since it is for a different beneficiary than the previous one. Then you switch the beneficiary for both accounts back to Suzie. Rinse, repeat. It's a fair amount of paperwork and you need to keep two rollover schedules straight to avoid running afoul of the rules, but it accomplishes what the OP needs done.
Awesome, thanks you.

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