FAFSA and Roth Pipeline Income Alternatives

[madamwitty]

Summary
I’ve previously written about how FAFSA double-counts the money coming through the Roth Pipeline. (Both the Traditional-to-Roth conversion and the Roth distribution are counted in the income assessment.) Alternative options for income covering living expenses include direct distribution from a Traditional IRA, or excess funds in a 529 Plan. Below, I provide a scenario based roughly on my own situation where these alternatives could reduce the overall cost of college. I’m looking for feedback to see if the options I’ve put together fundamentally make sense or whether I’m missing anything.

Also a specific question: which of the scenarios allow for the FAFSA Simplified EFC Calculation? That is to say, which can be filed with the 1040A or 1040EZ? I am having trouble figuring out which IRS forms are required for paying the IRA early withdrawal penalty or the 529 non-qualified expense penalty.

Assumptions
Consider the following scenario. I’ve rounded off the numbers & ignored inflation to make the math a little simpler:

• Ignore asset assessment (taxable accounts will likely be depleted after 5 years of priming the Roth pipeline; 529 Plan assets will not change the fundamental conclusions of this analysis.)
• $30,000 annual spending (but up to ~$45,000 AGI results in no tax for family of 5, thanks to Child Tax Credit)
• $30,000 FAFSA income exclusion for family of 5. Above the income exclusion, FAFSA adds 22%-47% of income to EFC on a progressive scale.
• College payments come out of a 529 Plan account, so don’t affect the income assessment.

Roth Pipeline:
Roth pipeline: $30,000 (Traditional-to-Roth conversion) + $30,000 (Roth distribution) - $30,000 (FAFSA income exclusion) = $30,000 income assessment -> EFC = ~$7,900.

Direct Withdrawals from Traditional IRA
Direct Traditional IRA withdrawal: $33,000 (Traditional IRA distribution covering penalty) - $30,000 (FAFSA income exclusion) = $3,000 income assessment -> EFC = ~$700 + $3,000 penalty to IRS

The total outlay is less than half of the Roth Pipeline case.

Better yet, I could set up a SEPP 72(t) withdrawal (if I can manage with the limited options to come up with the right annual withdrawal amount). If needed, I could decide later to stop taking withdrawals and retroactively pay the 10% penalty I would have paid anyway. I’d need to evaluate the effect on FAFSA and taxable income if the back-penalty is accumulated over multiple years…

SEPP 72(t): $30,000 (Traditional IRA SEPP) - $30,000 (FAFSA income exclusion) = $0 income assessment -> EFC = $0 + possible $3,000 penalty to IRS paid in a later year…

529 Plan Withdrawals
The best use for 529 Plan funds are to pay “qualified” higher education expenses, thereby avoiding taxes & penalties on withdrawals of earnings. However, if I look ahead and see I will end up with an overage, it might be worth spending the excess on living expenses during the years I am assessed by FAFSA. Let’s look at the extreme case where I could cover the whole year’s living expenses from the 529 Plan. Assume for simplicity that 50% of the value is from earnings.

529 Plan: ~$15,800 (529 Plan Earnings) - $30,000 (FAFSA income exclusion) = -$14,200 income assessment -> EFC = -$750 (which could offset an asset assessment) + $1,580 penalty to IRS

(Note: Total withdrawal is ~$31,580 to cover living expenses + 10% penalty on earnings.)

Additional Notes and Limitations
The above assumes all living expenses must be provided by “income” (e.g. Roth Pipeline or alternative). This might apply if there are little or no taxable accounts to draw from, or if I end up aiming specifically to avoid triggering capital gains for the Simplified EFC Calculation (which ignores assets). Otherwise, the income assessment is only half of the story - the other half being asset assessment. If there are substantial taxable accounts being assessed by FAFSA, it probably make sense to spend those down first.

With low enough living expenses (or high enough income exclusion - I can dream, right?), the Roth Pipeline might come in under the FAFSA income allowance, making the other methods mentioned above less beneficial.

Another important consideration is the inclusion of loans in a student aid package. Perhaps I was spoiled in that I went to a college that did not include loans in any student aid packages - only grants and work-study. There, one dollar less of EFC meant one dollar less paid! However, if reducing the EFC simply means we’ll get more loans in the aid package, then these approaches may not be as valuable.

Although FAFSA does not consider home equity in the asset assessment, many private colleges do. Some cap home equity to a multiple of annual income (e.g. 2 - 3 times annual income). In this case, since I’ll have substantial home equity, limiting perceived income is especially beneficial toward reducing EFC. (However, I am not sure if private colleges insist on double-counting the Roth Pipeline the same way FAFSA does?)

[sol]

I'm afraid I have very little to add, other than a plea for additional resources.  I feel like there should be an entire forum somewhere out there dedicated to answering these kinds of questions, because they are complicated and potentially worth tens of thousands of dollars.

Where have you been reading about these details, for example to determine the EFC based on your income and exclusion amounts?

[johnny847]

I'm afraid I have very little to add, other than a plea for additional resources.  I feel like there should be an entire forum somewhere out there dedicated to answering these kinds of questions, because they are complicated and potentially worth tens of thousands of dollars.

Where have you been reading about these details, for example to determine the EFC based on your income and exclusion amounts?

Posting mostly to follow, but you can find the worksheets from the Department of Education here http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf

[Cathy]

Where have you been reading about these details, for example to determine the EFC based on your income and exclusion amounts?

The statutory authority for US federal student aid is 20 USC § 1070 et seq. Many provisions authorise the Secretary to make regulations and those are codified at 34 CFR 668.1 et seq.

As for your specific question, the expected family contribution ("EFC") is determined according to the formulas provided in 20 USC § 1087kk et seq.

[johnny847]

Wait I do have something to contribute.

Roth Pipeline:
Roth pipeline: $30,000 (Traditional-to-Roth conversion) + $30,000 (Roth distribution) - $30,000 (FAFSA income exclusion) = $30,000 income assessment -> EFC = ~$7,900.

Have you looked at deferring your Roth pipeline to start after kids have finished college? It sounds like these scenarios are actually reflective of your personal situation if I recall correctly. But I'm guessing that because you didn't consider it you don't have the assets to accomplish this.

Direct Withdrawals from Traditional IRA
Direct Traditional IRA withdrawal: $33,000 (Traditional IRA distribution covering penalty) - $30,000 (FAFSA income exclusion) = $3,000 income assessment -> EFC = ~$700 + $3,000 penalty to IRS

The total outlay is less than half of the Roth Pipeline case.

You do not have to pay the penalty (technically an additional tax) in this scenario.

Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. ... However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax.

http://www.irs.gov/publications/p970/ch09.html

But I'm a bit unclear at the moment whether you can overlap this with educational tax benefits such as the AOTC or use of 529 funds. I suspect you can't - if you claim $2500 for the AOTC (max credit which requires $4000 in educaitonal expenses) I doubt you can claim exception to the 10% additional tax on early IRA distributions on the same $4k (but if your educational expenses were $8k and you claimed the $2500 AOTC and made a $4k withdrawal from a tIRA you could still claim the exception).

[teen persuasion]

Any chance you are eligible for the free/reduced school lunch program rather than trying to qualify thru the 1040A/EZ route?  For a family of 5, income below $52,559 would be eligible for reduced lunches.  The way the EFC rules are written, eligibility spans a few years.  On the 2014-15 FAFSA calculation booklet it asks if anyone in the household was eligible in 2013 or 2014.  So if you qualify for reduced lunches in your child's senior year of 2014-15, they would meet the FAFSA test for three consecutive years (2013-14, 2014-15, 2015-16).

So far, this is how we've qualified for the simplified needs test.  It is getting more challenging as our family size shrinks as the older ones graduate.  Since we have an HSA, the 1040A is not an option.  Of course, the rules were put into place before things like the HSA were invented.

[teen persuasion]

Also, don't forget that income is offset by fed income tax paid, a state tax percentage (to compensate for state income tax, sales tax, property tax), FICA and a working expenses offset (nothing if not working).  So your income can be a bit higher than just the income protection amount.

The asset protection amount is ridiculously small for the upcoming school year - I thought they'd dropped a digit!  Less than 10k!  It has been dropping each year, but this is falling off a cliff.

[seattlecyclone]

This is a very interesting topic. It adds a bunch of variables to consider in addition to taxation, and optimizing for FAFSA can cause you to pay extra tax (or vice versa).

I notice you have constrained yourself by taking the same amount of income each year as your expenses. What if you expanded your strategy to a longer time horizon? For example, you might convert a little bit of extra money to Roth each year until your kids go to college so that your pipeline is extra full during your FAFSA years and you can reduce your Roth conversions during that time. In tandem with this, you could withdraw a larger lump sum from your Roth IRA the year before you fill out your first FAFSA. This money could be parked in I bonds or cash or some other vehicle that will probably have lower returns than stock but will also not count as $1 of FAFSA income for every $1 you withdraw, and also won't require you to fill out the full 1040.

Another thing to consider is the automatic zero EFC calculation. According to the EFC formula document, they look at the AGI on your tax return to determine whether you're below the $24k threshold, not the full set of things that count as income for the FAFSA. Therefore Roth conversions would count toward this test, but untaxed Roth withdrawals would not. If you can keep your AGI below $24k during your FAFSA-submitting years, through extra withdrawals beforehand or some other method, the rest of this discussion might become moot.

Summary
Also a specific question: which of the scenarios allow for the FAFSA Simplified EFC Calculation? That is to say, which can be filed with the 1040A or 1040EZ? I am having trouble figuring out which IRS forms are required for paying the IRA early withdrawal penalty or the 529 non-qualified expense penalty.

The 10% additional tax for early withdrawal from IRAs or non-education 529 withdrawals is calculated on Form 5329, which does require the full 1040.

Additional Notes and Limitations
The above assumes all living expenses must be provided by “income” (e.g. Roth Pipeline or alternative). This might apply if there are little or no taxable accounts to draw from, or if I end up aiming specifically to avoid triggering capital gains for the Simplified EFC Calculation (which ignores assets). Otherwise, the income assessment is only half of the story - the other half being asset assessment. If there are substantial taxable accounts being assessed by FAFSA, it probably make sense to spend those down first.

Taxable brokerage accounts are an interesting case here. Any sales of stock in these accounts will force the full 1040, but dividends will not. These accounts will count as assets for the FAFSA, but that's irrelevant if you qualify for the simplified formula. Therefore if you have a sizable taxable account when you enter early retirement, you might benefit from withdrawing from the tax-advantaged accounts to start, leaving your taxable account alone until after the kids finish college, and perhaps even switching to a dividend-focused strategy in the taxable account. All of this goes contrary to what I usually tell people who are looking to maximize investment returns and minimize taxes, but the FAFSA throws another variable into the mix that must be considered as well.

All of these are just ideas. You'll have to run some numbers for yourself based on your own situation (different account balances, time until oldest kid starts college, number of years you'll be filing a FAFSA, etc.).

Any chance you are eligible for the free/reduced school lunch program rather than trying to qualify thru the 1040A/EZ route?  For a family of 5, income below $52,559 would be eligible for reduced lunches.  The way the EFC rules are written, eligibility spans a few years.  On the 2014-15 FAFSA calculation booklet it asks if anyone in the household was eligible in 2013 or 2014.  So if you qualify for reduced lunches in your child's senior year of 2014-15, they would meet the FAFSA test for three consecutive years (2013-14, 2014-15, 2015-16).

This is also worth considering. Many of us might feel like this is one step too far toward "gaming the system," and I can understand that. At the same time, many of us are planning to use ACA health insurance plans and other programs based on income (instead of assets) when we retire, and so we could consider that the free/reduced lunch program is little different in this regard.

So far, this is how we've qualified for the simplified needs test.  It is getting more challenging as our family size shrinks as the older ones graduate.  Since we have an HSA, the 1040A is not an option.

Having an HSA doesn't disqualify you from filing Form 1040A. Contributing to it or withdrawing from it is what brings form 8889 into play. Therefore you may find that switching to a non-HSA-eligible health plan and leaving your HSA alone for the remaining FAFSA-filing years may be a good idea if your free/reduced lunch eligibility expires.

[teen persuasion]

Lots of good info, Seattlecyclone! 

One little correction - the year before you fill out the FAFSA IS the year that is referenced, so any increased withdrawals would need to be two years beforehand.  IOW, if you will fill out the FAFSA early 2016 for a student graduating HS 2016, the calculations depend on your 2015 income, so extra withdrawals must be in 2014 for a planned college year 2016-17.

 It gets tricky when you have multiple children with overlapping college years.  More than one in college at a time LOWERS your income protection amount, but any calculated EFC is divided between the students.

[velocistar237]

Here's an article on the topic that says some of the same things. It mentions a DOE guidance letter suggesting that financial aid officers use their discretionary powers to adjust incomes that double-count rollovers and distributions. Not something to count on, but it's worth knowing people can make a plea if one of your friends gets stuck in that situation.

[madamwitty]

Thanks for all the great feedback! Keep it coming!

I'm afraid I have very little to add, other than a plea for additional resources.  I feel like there should be an entire forum somewhere out there dedicated to answering these kinds of questions, because they are complicated and potentially worth tens of thousands of dollars.

Where have you been reading about these details, for example to determine the EFC based on your income and exclusion amounts?

Agreed! Parents paying for college while FIRE'd does seem like somewhat of a niche demographic, but I am surprised that there is SO LITTLE information out there. Hopefully we can learn from each other and cobble together some good strategies.

As johnny847 noted, a writeup on the EFC Formula is posted at ifap.ed.gov. Here is the link to the latest one (2015-2016):

http://ifap.ed.gov/efcformulaguide/attachments/090214EFCFormulaGuide1516.pdf

I've been using the 2014-2015 version, but I doubt it has changed much.

Wait I do have something to contribute.

Roth Pipeline:
Roth pipeline: $30,000 (Traditional-to-Roth conversion) + $30,000 (Roth distribution) - $30,000 (FAFSA income exclusion) = $30,000 income assessment -> EFC = ~$7,900.

Have you looked at deferring your Roth pipeline to start after kids have finished college? It sounds like these scenarios are actually reflective of your personal situation if I recall correctly. But I'm guessing that because you didn't consider it you don't have the assets to accomplish this.

Good guess :-) I think I could FIRE in 5 years, the first kid goes to college 6 years after that, and then I put 3 kids through college over a span of 10 years. Long story short - I don't have the taxable assets to cover that :-)

Direct Withdrawals from Traditional IRA
Direct Traditional IRA withdrawal: $33,000 (Traditional IRA distribution covering penalty) - $30,000 (FAFSA income exclusion) = $3,000 income assessment -> EFC = ~$700 + $3,000 penalty to IRS

The total outlay is less than half of the Roth Pipeline case.

You do not have to pay the penalty (technically an additional tax) in this scenario.

Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. ... However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax.

http://www.irs.gov/publications/p970/ch09.html

But I'm a bit unclear at the moment whether you can overlap this with educational tax benefits such as the AOTC or use of 529 funds. I suspect you can't - if you claim $2500 for the AOTC (max credit which requires $4000 in educaitonal expenses) I doubt you can claim exception to the 10% additional tax on early IRA distributions on the same $4k (but if your educational expenses were $8k and you claimed the $2500 AOTC and made a $4k withdrawal from a tIRA you could still claim the exception).

I still think the penalty still applies - here I am talking about paying for my family's living expenses, not qualified educational expenses. It might be interesting to see if I could actually apply educational expenses both toward 529 expenses and IRA withdrawals. (That would be a pretty big loophole!)

Any chance you are eligible for the free/reduced school lunch program rather than trying to qualify thru the 1040A/EZ route?  For a family of 5, income below $52,559 would be eligible for reduced lunches.  The way the EFC rules are written, eligibility spans a few years.  On the 2014-15 FAFSA calculation booklet it asks if anyone in the household was eligible in 2013 or 2014.  So if you qualify for reduced lunches in your child's senior year of 2014-15, they would meet the FAFSA test for three consecutive years (2013-14, 2014-15, 2015-16).

So far, this is how we've qualified for the simplified needs test.  It is getting more challenging as our family size shrinks as the older ones graduate.  Since we have an HSA, the 1040A is not an option.  Of course, the rules were put into place before things like the HSA were invented.

That is a fantastic idea! My brain kind of skipped over that option when looking at eligibility for the simplified EFC test, since I didn't know anything about it and assumed we wouldn't qualify. I will definitely look more into that. In such a case, I could actually manage to use a (smaller) Roth pipeline. It would be important to get down to the $0 EFC level (<$25k AGI) rather than just the Simplified ("ignoring assets") version, but it could work well.

I have more to say but ran out of time now...more later.

[johnny847]

Direct Withdrawals from Traditional IRA
Direct Traditional IRA withdrawal: $33,000 (Traditional IRA distribution covering penalty) - $30,000 (FAFSA income exclusion) = $3,000 income assessment -> EFC = ~$700 + $3,000 penalty to IRS

The total outlay is less than half of the Roth Pipeline case.

You do not have to pay the penalty (technically an additional tax) in this scenario.

Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. ... However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax.

http://www.irs.gov/publications/p970/ch09.html

But I'm a bit unclear at the moment whether you can overlap this with educational tax benefits such as the AOTC or use of 529 funds. I suspect you can't - if you claim $2500 for the AOTC (max credit which requires $4000 in educaitonal expenses) I doubt you can claim exception to the 10% additional tax on early IRA distributions on the same $4k (but if your educational expenses were $8k and you claimed the $2500 AOTC and made a $4k withdrawal from a tIRA you could still claim the exception).

I still think the penalty still applies - here I am talking about paying for my family's living expenses, not qualified educational expenses. It might be interesting to see if I could actually apply educational expenses both toward 529 expenses and IRA withdrawals. (That would be a pretty big loophole!)

But it doesn't matter if you think you're using it for family living expenses. If you incur $30k in educational expenses, then that means (assuming you're not using any other tax advantaged way of paying for education) that you can withdraw $30k out of the IRA penalty free. You could liquidate a taxable to bank account A, and then pay for educational expenses out of that, and then liquidate your IRA to bank account B, and pay for living expenses out of that, but this is irrelevant to claiming the $30k from the tIRA was used for educational expenses. The only thing that matters is you incurred $30k in educational expenses and you withdrew $30k from the tIRA. (I believe the reason the IRS allows for this is all that money is fungible anyways).

BUT,

The 10% additional tax for early withdrawal from IRAs or non-education 529 withdrawals is calculated on Form 5329, which does require the full 1040.

So it's all moot really. I wrote up the above because that fungibility aspect can be applied to other situations regarding taxes and use of 529 funds.

Taxable brokerage accounts are an interesting case here. Any sales of stock in these accounts will force the full 1040, but dividends will not. These accounts will count as assets for the FAFSA, but that's irrelevant if you qualify for the simplified formula. Therefore if you have a sizable taxable account when you enter early retirement, you might benefit from withdrawing from the tax-advantaged accounts to start, leaving your taxable account alone until after the kids finish college, and perhaps even switching to a dividend-focused strategy in the taxable account. All of this goes contrary to what I usually tell people who are looking to maximize investment returns and minimize taxes, but the FAFSA throws another variable into the mix that must be considered as well.

I noticed this too - receiving dividends (and capital gains distributions, I might add) don't force you to file the full 1040 and the accompanying Schedule D. Makes for an interesting edge case where picking a fund for dividend yield and/or capital gains distributions may actually lower your overall expenses (where we're saying taxes are an expense).

Hell, I wonder if holding a bond fund in a taxable might actually be a good idea in this context? Haven't given this too much thought. Municipal bonds could cut down on the tax bite (of course, at a higher default risk). SDY (which I think is your favorite dividend growth ETF to pick on seattlecyclone?) yields 2.06% in dividends. VWAHX - Vanguard High Yield Tax Empt yields around 3.7% right now. Vanguard rates its risk potential at a 3 out of 5, for what it's worth.

Another fund idea: VWINX (Vanguard Wellesley income fund) yielded 4.75% in dividends and capital gains distributions in the last year. It is an actively managed fund with a 0.25% exp ratio (to be fair, really great for an active fund). I hesitate with the active management part but if I had to trust somebody with active management, it'd be Vanguard (well okay technically the fund advisor is Wellington Management). I'm not sure what proportion of the dividends were qualified dividends, but it holds about 1/3 stocks and 2/3 bonds, so assuming 100% qualified dividends from stocks, about 1/3 of the dividend yield would be qualified.

Vanguard Wellington (VWELX) is like the Wellesley fund with active management but they flip the asset allocation - 1/3 bonds and 2/3 stocks. Yielded 6.3% in capital gains distributions and dividends.

Again, I have my reservations about actively managed funds, but I'm just throwing ideas out there.

Side note/Disclaimer: I have no skin in this game. I am 24 and it will be a long time before I send kids to college, if at all. And it's virtually guaranteed that the rules will have changed by then. But, I actually have a lot of fun trying to minimize taxes, and if you look at, FAFSA is structured like a progressive "tax."

[kpd905]

Does FAFSA treat HSA withdrawals the same as traditional IRA withdrawals? I saw a few posts above that you need form 8889, but other than that they would be considered the same?

[johnny847]

madamwitty, you say you don't have a large amount of taxable assets. Then does it even matter to you to be able to use the simplified EFC formula? It shields assets, but retirement account assets and equity in your primary residence are already shielded anyway. And on top of that, the top marginal rate for assessing assets is 5.64% so it's not even that high.

[madamwitty]

I notice you have constrained yourself by taking the same amount of income each year as your expenses. What if you expanded your strategy to a longer time horizon? For example, you might convert a little bit of extra money to Roth each year until your kids go to college so that your pipeline is extra full during your FAFSA years and you can reduce your Roth conversions during that time. In tandem with this, you could withdraw a larger lump sum from your Roth IRA the year before you fill out your first FAFSA. This money could be parked in I bonds or cash or some other vehicle that will probably have lower returns than stock but will also not count as $1 of FAFSA income for every $1 you withdraw, and also won't require you to fill out the full 1040.

Good point. My first reaction is that it wouldn't work for me because my timeline is 5 years FIRE'd before FAFSA kicks in, and 10 years of college. That's a lot of living expenses to cram into the pipeline in 5 years. But on the other hand, I would come out ahead (or no worse) as long as I don't go over the 10% bracket (if the alternative is paying a 10% penalty on direct withdrawals). I'll take a look at the numbers.

Another thing to consider is the automatic zero EFC calculation. According to the EFC formula document, they look at the AGI on your tax return to determine whether you're below the $24k threshold, not the full set of things that count as income for the FAFSA. Therefore Roth conversions would count toward this test, but untaxed Roth withdrawals would not. If you can keep your AGI below $24k during your FAFSA-submitting years, through extra withdrawals beforehand or some other method, the rest of this discussion might become moot.

It's a good option, and I think eminently doable (especially since I am planning so far ahead.) Something to consider, though, is the idea that my kids may go to a private college. I want to keep that option open for them, and I've got to balance that against what works for the Zero EFC method. In that respect, the "cram the Roth pipeline full" strategy might work well for keeping all my options open.

Any chance you are eligible for the free/reduced school lunch program rather than trying to qualify thru the 1040A/EZ route?  For a family of 5, income below $52,559 would be eligible for reduced lunches.  The way the EFC rules are written, eligibility spans a few years.  On the 2014-15 FAFSA calculation booklet it asks if anyone in the household was eligible in 2013 or 2014.  So if you qualify for reduced lunches in your child's senior year of 2014-15, they would meet the FAFSA test for three consecutive years (2013-14, 2014-15, 2015-16).

This is also worth considering. Many of us might feel like this is one step too far toward "gaming the system," and I can understand that. At the same time, many of us are planning to use ACA health insurance plans and other programs based on income (instead of assets) when we retire, and so we could consider that the free/reduced lunch program is little different in this regard.

I have similar concerns. I have yet to look into the specifics of this option. I would feel a little icky actually accepting money from the reduced/free lunch program. But just applying and getting a letter saying I qualify? I wouldn't feel too bad about that.

[madamwitty]

madamwitty, you say you don't have a large amount of taxable assets. Then does it even matter to you to be able to use the simplified EFC formula? It shields assets, but retirement account assets and equity in your primary residence are already shielded anyway. And on top of that, the top marginal rate for assessing assets is 5.64% so it's not even that high.

I have enough time to sculpt my financial situation in different ways. I suspect the easiest thing to do is just spend down the taxable accounts prior to college and not even worry about the Simplified EFC option. But I wanted to explore the option a bit to see if there is something in there I've missed.

[johnny847]

madamwitty, you say you don't have a large amount of taxable assets. Then does it even matter to you to be able to use the simplified EFC formula? It shields assets, but retirement account assets and equity in your primary residence are already shielded anyway. And on top of that, the top marginal rate for assessing assets is 5.64% so it's not even that high.

I have enough time to sculpt my financial situation in different ways. I suspect the easiest thing to do is just spend down the taxable accounts prior to college and not even worry about the Simplified EFC option. But I wanted to explore the option a bit to see if there is something in there I've missed.

Ah.
Yea as best as I can tell, you should either go all out or nothing (get that zero EFC or just don't worry about the EFC calculation because the simplified one doesn't seem to help you that much anyway).

[madamwitty]

I still think the penalty still applies - here I am talking about paying for my family's living expenses, not qualified educational expenses. It might be interesting to see if I could actually apply educational expenses both toward 529 expenses and IRA withdrawals. (That would be a pretty big loophole!)

But it doesn't matter if you think you're using it for family living expenses. If you incur $30k in educational expenses, then that means (assuming you're not using any other tax advantaged way of paying for education) that you can withdraw $30k out of the IRA penalty free. You could liquidate a taxable to bank account A, and then pay for educational expenses out of that, and then liquidate your IRA to bank account B, and pay for living expenses out of that, but this is irrelevant to claiming the $30k from the tIRA was used for educational expenses. The only thing that matters is you incurred $30k in educational expenses and you withdrew $30k from the tIRA. (I believe the reason the IRS allows for this is all that money is fungible anyways).

I agree that the IRS doesn't care which account paid for what.

I plan to make qualified withdrawals from a 529 plan in the full amount of my education expenses. I think it's a crazy if the IRS would also allow me to claim qualified IRA withdrawals for that same amount (effectively double counting my educational expenses). But if they allow it, I want to know!

I don't plan to have anywhere near $30,000 in college expenses, though, so the bulk of the IRA withdrawal would still be "unqualified".

Side note/Disclaimer: I have no skin in this game. I am 24 and it will be a long time before I send kids to college, if at all. And it's virtually guaranteed that the rules will have changed by then. But, I actually have a lot of fun trying to minimize taxes, and if you look at, FAFSA is structured like a progressive "tax."

I totally get it :-) I have had fun thinking about FAFSA since before I had kids. But then I had no concept of FIRE, so all that previous thinking goes out the window!

[madamwitty]

madamwitty, you say you don't have a large amount of taxable assets. Then does it even matter to you to be able to use the simplified EFC formula? It shields assets, but retirement account assets and equity in your primary residence are already shielded anyway. And on top of that, the top marginal rate for assessing assets is 5.64% so it's not even that high.

I guess the other thing I forgot to say: 5.64% doesn't seem like a lot, but I'll be putting kids through college for 10 consecutive years. If I'm not careful, it can add up...

[johnny847]

madamwitty, you say you don't have a large amount of taxable assets. Then does it even matter to you to be able to use the simplified EFC formula? It shields assets, but retirement account assets and equity in your primary residence are already shielded anyway. And on top of that, the top marginal rate for assessing assets is 5.64% so it's not even that high.

I guess the other thing I forgot to say: 5.64% doesn't seem like a lot, but I'll be putting kids through college for 10 consecutive years. If I'm not careful, it can add up...

Haha true. (1-0.564)^10 = 55.96%. Of course this formula assumes quite a few things, like your taxable asset balance will only change from paying educational expenses and not from investment gains, but the effect is duly noted.

I plan to make qualified withdrawals from a 529 plan in the full amount of my education expenses. I think it's a crazy if the IRS would also allow me to claim qualified IRA withdrawals for that same amount (effectively double counting my educational expenses). But if they allow it, I want to know!

So I missed this the first time I quoted that IRS page (http://www.irs.gov/publications/p970/ch09.html):

Figuring the Amount Not Subject to the 10% Tax

To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes:

    Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7. Coverdell Education Savings Account);

    The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1. Scholarships, Fellowship Grants, Grants, and Tuition Reductions);

    Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1. Scholarships, Fellowship Grants, Grants, and Tuition Reductions);

    Veterans' educational assistance (see Veterans' Benefits in chapter 1. Scholarships, Fellowship Grants, Grants, and Tuition Reductions);

    Employer-provided educational assistance (see chapter 11. Employer-Provided Educational Assistance ); and

    Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Do not reduce the qualified education expenses by amounts paid with funds the student receives as:

    Payment for services, such as wages;

    A loan;

    A gift;

    An inheritance given to either the student or the individual making the withdrawal; or

    A withdrawal from personal savings (including savings from a qualified tuition program (QTP)).

If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax.

[emphasis mine]

So we have the seemingly too good to be true conclusion that you can overlap the exception to the early IRA distribution penalty with the use of 529 (otherwise known as QTP) funds?

Hmm...
Now time to check the section on 529s whether the 520 funds can overlap with the exception to the early IRA distribution penalty:
I could only find text in the publication on coordinating the use of 529 funds with the AOTC, LLC, Coverdell ESAs, and tuition and fees deduction.
However, if Cathy were commenting on this thread she would say that IRS publications do not have the force of law, they are merely an IRS interpretation of the law. Just because the IRS publication doesn't talk about it doesn't mean it is or isn't legal. 

[kpd905]

From a little research I did today it looks like HSA distributions for qualified medical expenses don't count as income for FAFSA, so yet another reason to keep your receipts and wait. 

I doubt they'd add up to even one full year of expenses for most people, but you might be able to pull a bit out each year the kids are in college to stay under certain thresholds.

[madamwitty]

So we have the seemingly too good to be true conclusion that you can overlap the exception to the early IRA distribution penalty with the use of 529 (otherwise known as QTP) funds?

Hmm...
Now time to check the section on 529s whether the 520 funds can overlap with the exception to the early IRA distribution penalty:
I could only find text in the publication on coordinating the use of 529 funds with the AOTC, LLC, Coverdell ESAs, and tuition and fees deduction.
However, if Cathy were commenting on this thread she would say that IRS publications do not have the force of law, they are merely an IRS interpretation of the law. Just because the IRS publication doesn't talk about it doesn't mean it is or isn't legal.

Wow, the IRA guidance is surprising! And interesting that IRS is silent on the flip side.

[madamwitty]

I ran some numbers on the "Cram The Pipeline Full Strategy" suggested above by seattlecyclone (my words, not his). Perhaps I will share some numbers later.

As I was running the numbers, I was once again shocked (SHOCKED I say) to realize how much AGI a family of 5 can have without paying taxes. The tax calculator I looked at for my OP was somehow wrong; when I derived the numbers myself (and checked against a different calculator) I get $58,750 resulting in no tax. ($12,600 standard deduction; $4,000 * 5 personal exemptions; $3,000 child tax credit). Is this right? Moral of the story: understand how your taxes work, don't just trust a calculator.

I note that this would put me in the 15% tax bracket. The Child Tax Credit is non-refundable. However, if I had >$3,000 of earned income, I would qualify for the Additional Child Tax Credit, which appears to be a refundable version of the Child Tax Credit. In that case, I think it makes sense to limit Roth conversion to 10% bracket and take/save the remaining refund to pay 10% penalty on a direct IRA withdrawal in another year, if needed. (As opposed to applying it to a tax bill on Roth conversion in the 15% bracket.) In the meantime, the refund could be invested and grow. Is this thinking correct? It doesn’t play nicely with FAFSA, though, unless you qualify for the Simplified EFC or Zero EFC.

[teen persuasion]

I ran some numbers on the "Cram The Pipeline Full Strategy" suggested above by seattlecyclone (my words, not his). Perhaps I will share some numbers later.

As I was running the numbers, I was once again shocked (SHOCKED I say) to realize how much AGI a family of 5 can have without paying taxes. The tax calculator I looked at for my OP was somehow wrong; when I derived the numbers myself (and checked against a different calculator) I get $58,750 resulting in no tax. ($12,600 standard deduction; $4,000 * 5 personal exemptions; $3,000 child tax credit). Is this right? Moral of the story: understand how your taxes work, don't just trust a calculator.

I note that this would put me in the 15% tax bracket. The Child Tax Credit is non-refundable. However, if I had >$3,000 of earned income, I would qualify for the Additional Child Tax Credit, which appears to be a refundable version of the Child Tax Credit. In that case, I think it makes sense to limit Roth conversion to 10% bracket and take/save the remaining refund to pay 10% penalty on a direct IRA withdrawal in another year, if needed. (As opposed to applying it to a tax bill on Roth conversion in the 15% bracket.) In the meantime, the refund could be invested and grow. Is this thinking correct? It doesn’t play nicely with FAFSA, though, unless you qualify for the Simplified EFC or Zero EFC.

I believe you would need earned income >$23,000 to be eligible to receive the entire $3k in Additional CTC.  The calculations subtract $3k from your earned income, then multiply the result by .15.

Since we are still working, I hadn't paid attention to the EARNED income component of this refundable credit for future FIRE plans.  Thanks for bringing it to my attention.  It is reaffirming my plans to continue PT work after DH retires, at least for a while.  Lots of advantages to having a small earned component to our income, at least tax wise: EITC, Additional CTC, savers credit, ability to fund retirement accounts.

[Gin1984]

I still think the penalty still applies - here I am talking about paying for my family's living expenses, not qualified educational expenses. It might be interesting to see if I could actually apply educational expenses both toward 529 expenses and IRA withdrawals. (That would be a pretty big loophole!)

But it doesn't matter if you think you're using it for family living expenses. If you incur $30k in educational expenses, then that means (assuming you're not using any other tax advantaged way of paying for education) that you can withdraw $30k out of the IRA penalty free. You could liquidate a taxable to bank account A, and then pay for educational expenses out of that, and then liquidate your IRA to bank account B, and pay for living expenses out of that, but this is irrelevant to claiming the $30k from the tIRA was used for educational expenses. The only thing that matters is you incurred $30k in educational expenses and you withdrew $30k from the tIRA. (I believe the reason the IRS allows for this is all that money is fungible anyways).

I agree that the IRS doesn't care which account paid for what.

I plan to make qualified withdrawals from a 529 plan in the full amount of my education expenses. I think it's a crazy if the IRS would also allow me to claim qualified IRA withdrawals for that same amount (effectively double counting my educational expenses). But if they allow it, I want to know!

I don't plan to have anywhere near $30,000 in college expenses, though, so the bulk of the IRA withdrawal would still be "unqualified".

Side note/Disclaimer: I have no skin in this game. I am 24 and it will be a long time before I send kids to college, if at all. And it's virtually guaranteed that the rules will have changed by then. But, I actually have a lot of fun trying to minimize taxes, and if you look at, FAFSA is structured like a progressive "tax."

I totally get it :-) I have had fun thinking about FAFSA since before I had kids. But then I had no concept of FIRE, so all that previous thinking goes out the window!

They do not allow you to double up, they allow you to chose between the two.  The best would be to withdraw directly from your traditional IRA for tuition and pay for living expenses through the 529. 

[johnny847]

I still think the penalty still applies - here I am talking about paying for my family's living expenses, not qualified educational expenses. It might be interesting to see if I could actually apply educational expenses both toward 529 expenses and IRA withdrawals. (That would be a pretty big loophole!)

But it doesn't matter if you think you're using it for family living expenses. If you incur $30k in educational expenses, then that means (assuming you're not using any other tax advantaged way of paying for education) that you can withdraw $30k out of the IRA penalty free. You could liquidate a taxable to bank account A, and then pay for educational expenses out of that, and then liquidate your IRA to bank account B, and pay for living expenses out of that, but this is irrelevant to claiming the $30k from the tIRA was used for educational expenses. The only thing that matters is you incurred $30k in educational expenses and you withdrew $30k from the tIRA. (I believe the reason the IRS allows for this is all that money is fungible anyways).

I agree that the IRS doesn't care which account paid for what.

I plan to make qualified withdrawals from a 529 plan in the full amount of my education expenses. I think it's a crazy if the IRS would also allow me to claim qualified IRA withdrawals for that same amount (effectively double counting my educational expenses). But if they allow it, I want to know!

I don't plan to have anywhere near $30,000 in college expenses, though, so the bulk of the IRA withdrawal would still be "unqualified".

Side note/Disclaimer: I have no skin in this game. I am 24 and it will be a long time before I send kids to college, if at all. And it's virtually guaranteed that the rules will have changed by then. But, I actually have a lot of fun trying to minimize taxes, and if you look at, FAFSA is structured like a progressive "tax."

I totally get it :-) I have had fun thinking about FAFSA since before I had kids. But then I had no concept of FIRE, so all that previous thinking goes out the window!

They do not allow you to double up, they allow you to chose between the two.  The best would be to withdraw directly from your traditional IRA for tuition and pay for living expenses through the 529.

Are you sure about this? I assumed that to be true, but what I quoted above seems to imply otherwise.
I agree it's always better to use 529 funds for living expenses first, but if madamwitty has more money in the 529s than what will cover living expenses, then she will need an exit strategy for that money.

[Gin1984]

I still think the penalty still applies - here I am talking about paying for my family's living expenses, not qualified educational expenses. It might be interesting to see if I could actually apply educational expenses both toward 529 expenses and IRA withdrawals. (That would be a pretty big loophole!)

But it doesn't matter if you think you're using it for family living expenses. If you incur $30k in educational expenses, then that means (assuming you're not using any other tax advantaged way of paying for education) that you can withdraw $30k out of the IRA penalty free. You could liquidate a taxable to bank account A, and then pay for educational expenses out of that, and then liquidate your IRA to bank account B, and pay for living expenses out of that, but this is irrelevant to claiming the $30k from the tIRA was used for educational expenses. The only thing that matters is you incurred $30k in educational expenses and you withdrew $30k from the tIRA. (I believe the reason the IRS allows for this is all that money is fungible anyways).

I agree that the IRS doesn't care which account paid for what.

I plan to make qualified withdrawals from a 529 plan in the full amount of my education expenses. I think it's a crazy if the IRS would also allow me to claim qualified IRA withdrawals for that same amount (effectively double counting my educational expenses). But if they allow it, I want to know!

I don't plan to have anywhere near $30,000 in college expenses, though, so the bulk of the IRA withdrawal would still be "unqualified".

Side note/Disclaimer: I have no skin in this game. I am 24 and it will be a long time before I send kids to college, if at all. And it's virtually guaranteed that the rules will have changed by then. But, I actually have a lot of fun trying to minimize taxes, and if you look at, FAFSA is structured like a progressive "tax."

I totally get it :-) I have had fun thinking about FAFSA since before I had kids. But then I had no concept of FIRE, so all that previous thinking goes out the window!

They do not allow you to double up, they allow you to chose between the two.  The best would be to withdraw directly from your traditional IRA for tuition and pay for living expenses through the 529.

Are you sure about this? I assumed that to be true, but what I quoted above seems to imply otherwise.
I agree it's always better to use 529 funds for living expenses first, but if madamwitty has more money in the 529s than what will cover living expenses, then she will need an exit strategy for that money.

Yes I am sure.  Let me find a link.   And yes, it does depend on how much she/he will have the account.  It also depends on if his/her kids get scholarships or work.  Not all can be planned this far in advance. 

[johnny847]

They do not allow you to double up, they allow you to chose between the two.  The best would be to withdraw directly from your traditional IRA for tuition and pay for living expenses through the 529.

Are you sure about this? I assumed that to be true, but what I quoted above seems to imply otherwise.
I agree it's always better to use 529 funds for living expenses first, but if madamwitty has more money in the 529s than what will cover living expenses, then she will need an exit strategy for that money.

Yes I am sure.  Let me find a link.   And yes, it does depend on how much she/he will have the account.  It also depends on if his/her kids get scholarships or work.  Not all can be planned this far in advance.

I realize not all of this can be planned for in advance, but it's good to have a plan for the different forseeable scenarios.

For example, if the kid gets a scholarship, you can withdraw money from the 529 in the amount of the scholarship penalty but not tax free. And I believe actually you can do this in conjunction with withdrawing for living expenses unless the scholarship actually covers living expenses as well.

If by kids working you mean work in lieu of college, then for someone with multiple kids there is an easy contingency plan: switch the name of the beneficiary of the account to a different kid. Of course, if all kids end up working in lieu of college, then this won't work. But maybe you have a niece or nephew that is going to college. Strike a deal with your sibling (in law?) to cash out the money for the niece or nephew and have them pay you back (or maybe even give them a discount on the money, since they're going to be helping you avoid a 10% penalty anyway).

If by kids working you mean working while in college and that affects the EFC calculation, well I don't think (at least in most cases) that's actually a problem because the EFC is only ever a portion of a kid's income.

[teen persuasion]

I think I need a primer on the details of 529 accounts.  I looked into them years ago, and decided at the time that they didn't make sense for us.  Looking again now, I'm beginning to see possible benefits, but I'm still unclear about certain rules.

What I believe I've learned so far:

Make contributions, possibly get state tax benefit.
Growth is tax free.
Withdrawals for qualified education expenses are tax free and penalty free.
Unqualified withdrawals have a 10% penalty, and gains are included as regular taxable income.
You can make unqualified withdrawals w/o penalty in certain circumstances, but gains are still included as regular taxable income.
Withdrawals are prorated : contributions to gains.


The part I'm unclear about is whether contributions are always tax free, or only if qualified.

Some of the interesting exceptions for withdrawals that are unqualified but penalty free:

Scholarships
For tuition paid to claim AOG
Military academy
Disability
Death

Regarding living expenses: if the student lives off campus, they can claim living expenses up to the school's amount included in expected cost of attendance figures.  I've seen schools with 3 sets of figures: live at home, live off campus, live on campus.

What else am I missing?

[Gin1984]

I think I need a primer on the details of 529 accounts.  I looked into them years ago, and decided at the time that they didn't make sense for us.  Looking again now, I'm beginning to see possible benefits, but I'm still unclear about certain rules.

What I believe I've learned so far:

Make contributions, possibly get state tax benefit.
Growth is tax free.
Withdrawals for qualified education expenses are tax free and penalty free.
Unqualified withdrawals have a 10% penalty, and gains are included as regular taxable income.
You can make unqualified withdrawals w/o penalty in certain circumstances, but gains are still included as regular taxable income.
Withdrawals are prorated : contributions to gains.


The part I'm unclear about is whether contributions are always tax free, or only if qualified.

Some of the interesting exceptions for withdrawals that are unqualified but penalty free:

Scholarships
For tuition paid to claim AOG
Military academy
Disability
Death

Regarding living expenses: if the student lives off campus, they can claim living expenses up to the school's amount included in expected cost of attendance figures.  I've seen schools with 3 sets of figures: live at home, live off campus, live on campus.

What else am I missing?

From the federal government, there is not a penalty if it is the contributions.  That said, some states do impose a penalty I believe, if you get a state deduction. 
I personally am not putting money in because I have other buckets to fill first, but it can be useful.  Especially for graduate students who earn income and live in a state with a deduction.

[johnny847]

The part I'm unclear about is whether contributions are always tax free, or only if qualified.

As Gin1984 said, withdrawals of contributions are never penalized by the federal government, but some states do recapture tax deductions you previously received if you do make a non qualified withdrawal.
And as you said, withdrawals are always pro rated contributions to gains. You can't withdraw just contributions the way that you can with Roth IRAs.

However, you can hold two different 529s, one for bonds and one for stocks. Rebalance between the two by rolling over funds between them, or with new contributions. Then when it comes time to pay for college, pull money out of the stocks 529 first, because that should have the highest proportion of gains. Then once that is depleted, pull money out of the bonds 529. If there is any money left over in the bonds 529 once all educational expenses have been paid for, then any withdrawals will have a lower proportion of gains than the stocks 529, and now you've lowered the penalty paid.

I personally am not putting money in because I have other buckets to fill first, but it can be useful.  Especially for graduate students who earn income and live in a state with a deduction.

I do this every year. Great trick - put money in, take money out 10 days later (minimum holding requirement under my state's plan), and nab a $2000 tax deduction (if only the deduction were higher).

[madamwitty]

I ran some numbers on the "Cram The Pipeline Full Strategy" suggested above by seattlecyclone (my words, not his). Perhaps I will share some numbers later.

As I was running the numbers, I was once again shocked (SHOCKED I say) to realize how much AGI a family of 5 can have without paying taxes. The tax calculator I looked at for my OP was somehow wrong; when I derived the numbers myself (and checked against a different calculator) I get $58,750 resulting in no tax. ($12,600 standard deduction; $4,000 * 5 personal exemptions; $3,000 child tax credit). Is this right? Moral of the story: understand how your taxes work, don't just trust a calculator.

I note that this would put me in the 15% tax bracket. The Child Tax Credit is non-refundable. However, if I had >$3,000 of earned income, I would qualify for the Additional Child Tax Credit, which appears to be a refundable version of the Child Tax Credit. In that case, I think it makes sense to limit Roth conversion to 10% bracket and take/save the remaining refund to pay 10% penalty on a direct IRA withdrawal in another year, if needed. (As opposed to applying it to a tax bill on Roth conversion in the 15% bracket.) In the meantime, the refund could be invested and grow. Is this thinking correct? It doesn’t play nicely with FAFSA, though, unless you qualify for the Simplified EFC or Zero EFC.

I believe you would need earned income >$23,000 to be eligible to receive the entire $3k in Additional CTC.  The calculations subtract $3k from your earned income, then multiply the result by .15.

Since we are still working, I hadn't paid attention to the EARNED income component of this refundable credit for future FIRE plans.  Thanks for bringing it to my attention.  It is reaffirming my plans to continue PT work after DH retires, at least for a while.  Lots of advantages to having a small earned component to our income, at least tax wise: EITC, Additional CTC, savers credit, ability to fund retirement accounts.

Good to know! Thanks for looking into the details. So, with just a fractional refund it makes sense to max out the Roth conversion to up to the point of the full regular CTC.

[madamwitty]

They do not allow you to double up, they allow you to chose between the two.  The best would be to withdraw directly from your traditional IRA for tuition and pay for living expenses through the 529.

Are you sure about this? I assumed that to be true, but what I quoted above seems to imply otherwise.
I agree it's always better to use 529 funds for living expenses first, but if madamwitty has more money in the 529s than what will cover living expenses, then she will need an exit strategy for that money.

Just to be clear - you are talking about student living expenses? I include both student living expenses and tuition as "education expenses" and expect to have enough 529 funds to cover both.

But I am planning far enough ahead I have flexibility in how much I put into the 529 vs. taxable investments (which could be spent down prior to FAFSA years.) So the [rhetorical] question is, how much should I save in the 529? (That's a topic which could take up a whole thread of its own). The benefit drawing tuition expenses from a 529 (as opposed to IRA) is that it does not count as income for the EFC calculation (IRA does.) There may be no 10% penalty on the IRA withdrawal but there's a EFC bump of 22%+ of the withdrawal amount for the following year. (The downside of the 529 is that it's assessed as an asset at 5.64%) I suspect it makes sense to pay tuition out of 529 funds for the first few years and out of IRA withdrawals the last few years. But there is also the uncertainty and possibility of over-saving in a 529, and needing to pay a 10% penalty to get the money out (as noted in the OP it might make sense to use this for family/parent living expenses in lieu of a similar IRA withdrawal which would also incur 10% penalty).

One related question: Assuming you get an EFC and the college offers an aid package covering the rest with grants/work study, how does the amount you pay (EFC) get apportioned between student living expenses and tuition? As a parent, do you have any control over this?

[madamwitty]

However, you can hold two different 529s, one for bonds and one for stocks. Rebalance between the two by rolling over funds between them, or with new contributions. Then when it comes time to pay for college, pull money out of the stocks 529 first, because that should have the highest proportion of gains. Then once that is depleted, pull money out of the bonds 529. If there is any money left over in the bonds 529 once all educational expenses have been paid for, then any withdrawals will have a lower proportion of gains than the stocks 529, and now you've lowered the penalty paid.

This is an interesting strategy. During a "rebalance" partial rollover, who keeps track of the contributions vs. earnings amount? (Is this something I'm supposed to have been tracking myself all along?!)  Would you/can you rebalance during college years without tax or FAFSA implications? Is there a limit on how often you can do partial rollovers?

[johnny847]

Just to be clear - you are talking about student living expenses? I include both student living expenses and tuition as "education expenses" and expect to have enough 529 funds to cover both.

It is important to distinguish tuition from student living expenses because for federal tax credits and deductions (AOTC, LLC, and tuition and fees deduction). only tuition and required fees are qualified educational expenses.
However, for the purposes of 529s, student living expenses (room and board) are also qualified educational expenses. This is why a 529 should always be used for living expenses first.
Also, it does not matter how much is incurred in living expenses. What can be claimed as tax free use of 529 funds is the greater of
1) room and board actually charged by the school
2) the school's cost of attendance (look under their financial aid figures) breakdown of room and board expenses. As noted by by teen persuasion, sometimes the figures are different for those living on campus, off campus, or at home.

Also, I would highly advise that you pay for at least $2000 of expenses out of pocket (not from a 529, and I'm pretty sure not from an IRA but that seems a bit unclear at this moment). The AOTC gives you a dollar for dollar credit for the first $2k in educational expenses. The AOTC also gives you a 25% credit for the next $2000 in expenses - so to get the maximum benefit pay at least $4k out of pocket.

One related question: Assuming you get an EFC and the college offers an aid package covering the rest with grants/work study, how does the amount you pay (EFC) get apportioned between student living expenses and tuition? As a parent, do you have any control over this?

I honestly have no clue. This is where my not having any skin in the game comes into play haha. This aspect isn't interesting to me, at least not at this stage in my life ;)
If you want my speculation - I don't think you as a parent have any control over it.

However, you can hold two different 529s, one for bonds and one for stocks. Rebalance between the two by rolling over funds between them, or with new contributions. Then when it comes time to pay for college, pull money out of the stocks 529 first, because that should have the highest proportion of gains. Then once that is depleted, pull money out of the bonds 529. If there is any money left over in the bonds 529 once all educational expenses have been paid for, then any withdrawals will have a lower proportion of gains than the stocks 529, and now you've lowered the penalty paid.

This is an interesting strategy. During a "rebalance" partial rollover, who keeps track of the contributions vs. earnings amount? (Is this something I'm supposed to have been tracking myself all along?!)  Would you/can you rebalance during college years without tax or FAFSA implications? Is there a limit on how often you can do partial rollovers?

I've never done it before nor actually contemplated doing it myself, so I'm not sure. But I think the account custodian (ie, Vanguard) has to track this. You are not responsible for tracking this if you don't do any rollovers, so I doubt that you'd somehow inherit this responsibility if you do a rollover.
I don't see too much of a need to rebalance during college years - wouldn't you just rebalance by making withdrawals from the appropriate 529? Sure you'd be reducing the benefit of the stocks vs bonds 529 strategy, but having the asset allocation the way you want it is more important.
No idea if there is a limit on how often you can do partial rollovers. I'd imagine every state has different rules.

Um now that I think about it, rebalancing by rollovers between the two is going to lessen the benefit of this strategy isn't it? By rolling over money from the stocks 529 to the bonds 529, the stocks 529 will probably still have higher proportional gains than the bonds 529? If you could do specific identification of shares as in taxable accounts then maybe you could avoid this issue but as far as I know that's not possible in 529s.

But I think this strategy is still viable except for those who want to frontload their 529 savings. I'm assuming most people would make regular contributions to a 529 year after year. If this were true, you'd want to shift your asset allocation towards more bonds as the kid gets older anyway.

[Gin1984]

Just to be clear - you are talking about student living expenses? I include both student living expenses and tuition as "education expenses" and expect to have enough 529 funds to cover both.

It is important to distinguish tuition from student living expenses because for federal tax credits and deductions (AOTC, LLC, and tuition and fees deduction). only tuition and required fees are qualified educational expenses.
However, for the purposes of 529s, student living expenses (room and board) are also qualified educational expenses. This is why a 529 should always be used for living expenses first.
Also, it does not matter how much is incurred in living expenses. What can be claimed as tax free use of 529 funds is the greater of
1) room and board actually charged by the school
2) the school's cost of attendance (look under their financial aid figures) breakdown of room and board expenses. As noted by by teen persuasion, sometimes the figures are different for those living on campus, off campus, or at home.

Also, I would highly advise that you pay for at least $2000 of expenses out of pocket (not from a 529, and I'm pretty sure not from an IRA but that seems a bit unclear at this moment). The AOTC gives you a dollar for dollar credit for the first $2k in educational expenses. The AOTC also gives you a 25% credit for the next $2000 in expenses - so to get the maximum benefit pay at least $4k out of pocket.

One related question: Assuming you get an EFC and the college offers an aid package covering the rest with grants/work study, how does the amount you pay (EFC) get apportioned between student living expenses and tuition? As a parent, do you have any control over this?

I honestly have no clue. This is where my not having any skin in the game comes into play haha. This aspect isn't interesting to me, at least not at this stage in my life ;)
If you want my speculation - I don't think you as a parent have any control over it.

However, you can hold two different 529s, one for bonds and one for stocks. Rebalance between the two by rolling over funds between them, or with new contributions. Then when it comes time to pay for college, pull money out of the stocks 529 first, because that should have the highest proportion of gains. Then once that is depleted, pull money out of the bonds 529. If there is any money left over in the bonds 529 once all educational expenses have been paid for, then any withdrawals will have a lower proportion of gains than the stocks 529, and now you've lowered the penalty paid.

This is an interesting strategy. During a "rebalance" partial rollover, who keeps track of the contributions vs. earnings amount? (Is this something I'm supposed to have been tracking myself all along?!)  Would you/can you rebalance during college years without tax or FAFSA implications? Is there a limit on how often you can do partial rollovers?

I've never done it before nor actually contemplated doing it myself, so I'm not sure. But I think the account custodian (ie, Vanguard) has to track this. You are not responsible for tracking this if you don't do any rollovers, so I doubt that you'd somehow inherit this responsibility if you do a rollover.
I don't see too much of a need to rebalance during college years - wouldn't you just rebalance by making withdrawals from the appropriate 529? Sure you'd be reducing the benefit of the stocks vs bonds 529 strategy, but having the asset allocation the way you want it is more important.
No idea if there is a limit on how often you can do partial rollovers. I'd imagine every state has different rules.

Um now that I think about it, rebalancing by rollovers between the two is going to lessen the benefit of this strategy isn't it? By rolling over money from the stocks 529 to the bonds 529, the stocks 529 will probably still have higher proportional gains than the bonds 529? If you could do specific identification of shares as in taxable accounts then maybe you could avoid this issue but as far as I know that's not possible in 529s.

But I think this strategy is still viable except for those who want to frontload their 529 savings. I'm assuming most people would make regular contributions to a 529 year after year. If this were true, you'd want to shift your asset allocation towards more bonds as the kid gets older anyway.

Very few universities offer anything other than loans for living expenses.    Also, removing money from a traditional IRA for living expenses is also allowed, without penalty for a full time student.

[Cgbg]

Seems like plenty of other posters have answered your actual questions. I just wanted to point out that universities typically "gap" between what the FAFSA determines for your EFC and what aid the school will offer. The family is expected to close that gap, and schools often point folks to PLUS loans and private loans. The gap is often shockingly big.

I'd suggest taking a look at some of the schools that you may consider your kids attending. Each school's website will have a net price calculator that is somewhat accurate. At least you'll get a sense of what sort of gap you'll see.

I understand what you are trying to do, and I think it's great. Lowering your income prior to the college years is a good way to increase aid. But you may go through all that and only get an extra $5k in Pell Grants, depending on the school and state. That may not be enough to close the gap. Just be aware that there is a gap and most schools don't meet "full need".

And many of the more exclusive schools tend to use something called CSS Profile instead of FAFSA to determine the EFC. Profile looks very deeply into your assets, including things that FAFSA doesn't ask about. Folks often look at the more exclusive schools for financial aid because they are much more generous up to certain income levels. If you don't mind them looking into every nook and cranny of your financial picture, then maybe those schools will be an option.

[teen persuasion]

They do not allow you to double up, they allow you to chose between the two.  The best would be to withdraw directly from your traditional IRA for tuition and pay for living expenses through the 529.

Are you sure about this? I assumed that to be true, but what I quoted above seems to imply otherwise.
I agree it's always better to use 529 funds for living expenses first, but if madamwitty has more money in the 529s than what will cover living expenses, then she will need an exit strategy for that money.

Just to be clear - you are talking about student living expenses? I include both student living expenses and tuition as "education expenses" and expect to have enough 529 funds to cover both.

But I am planning far enough ahead I have flexibility in how much I put into the 529 vs. taxable investments (which could be spent down prior to FAFSA years.) So the [rhetorical] question is, how much should I save in the 529? (That's a topic which could take up a whole thread of its own). The benefit drawing tuition expenses from a 529 (as opposed to IRA) is that it does not count as income for the EFC calculation (IRA does.) There may be no 10% penalty on the IRA withdrawal but there's a EFC bump of 22%+ of the withdrawal amount for the following year. (The downside of the 529 is that it's assessed as an asset at 5.64%) I suspect it makes sense to pay tuition out of 529 funds for the first few years and out of IRA withdrawals the last few years. But there is also the uncertainty and possibility of over-saving in a 529, and needing to pay a 10% penalty to get the money out (as noted in the OP it might make sense to use this for family/parent living expenses in lieu of a similar IRA withdrawal which would also incur 10% penalty).

One related question: Assuming you get an EFC and the college offers an aid package covering the rest with grants/work study, how does the amount you pay (EFC) get apportioned between student living expenses and tuition? As a parent, do you have any control over this?

Unless a scholarship can't be used for anything but tuition, aid is just applied to the bill, and you pay the remainder.  There generally is no apportioning between different expenses.  It really is only an issue for your taxes, and you have the choice of how you wish to divide it up.  Scholarships and grants are not taxable if they are used for tuition, but are if used for living expenses.  If you wish to claim the AOG, you must pay some tuition with non-scholarship money (cash, loans, etc.), up to $4k to get the full credit.  Any excess scholarship money (not used for tuition) must be claimed as taxable income. 

It is a delicate balancing act each year figuring out how much of which type of aid to allocate to which type of bills, to maximize the college credits and minimize the taxable scholarship income.  State credits don't exactly align with federal credits, either.  Some include books, some exclude, etc.  It is also confusing due to the 1098t you receive from the college reporting scholarships, grants and bills.  Colleges can report either amounts billed or paid (which might get paid later) in a calendar year.  The amounts can be incorrect, and are just informational, but if you do your taxes with SW like TurboTax, it will prompt you to input the amounts and treat it like fact, and assume you want to assign all scholarships to tuition (minimize taxable scholarships income), making you ineligible for the AOG.  You have to know how you want to override amounts to get the best result between the parent's taxes AND the student's taxes. 

Some schools send better 1098Ts than others - DS2's college included a detailed breakdown of all bills and credits, DD1's and DD3's colleges only have totals and we had trouble recreating the parts from the online to-the-student-only billing system.  No paper bills are issued, only online balances, that can change (a credit is applied, then reversed, then altered) - it is maddening.  Some schools do all billing in the second half of the year, that is, in August for fall semester, in early December for spring semester.  This is actually a good thing - it gets a full year of expenses in a calendar year, and all years in 4 rather than 5 tax years (since the AOG can only be claimed 4 times).  Otherwise you end up unable to claim expenses for the final spring semester if you pay after January 1.

The AOG is partially refundable.  It can be up to $2500 credit, but only up to $1k is refundable.  I believe you can use $1500 as a credit and take the $1k refund, if you owe $1500 tax.  I also believe that if you claim <$4k in tuition and your credit is reduced, the refundable portion is prorated (40%).

The interesting things I found out while looking for rules about the 529 withdrawals: you can (and one site insisted, should) withdraw the amount of scholarships to get those funds out of the 529 w/o penalty (though I think gains are taxable income).  There is a similar penalty loophole if you claim the AOG - you would not be eligible for the credit using 529 funds, but it seems you can withdraw the amount used to qualify for the credit penalty free but gains taxable.  If you have loans to use for educational expenses, also withdraw funds up to that amount, again to get the funds out. You are mentally spending the 529 funds on college expenses, and the loans on other stuff.

Generally, I believe the first aid given is loans, then maybe work study, then grants and scholarships, with federal and state grants before the institution's grants and scholarships.  No real proof, just the hierarchy I sense.  Federal grants like PELL and state grants like TAP in NY depend on your EFC - subtract your EFC from the max grant amount for each, if negative then zero.  IOW, a zero EFC gets you approx max PELL and TAP, EFC $3k gets partial, EFC $6k gets zero.  School scholarships and grants can be merit and or need based, and can have stipulations.  DD3 has a $2500 academic "in residence" scholarship that requires she live on campus.  She has done the math and will be giving this scholarship up to live just off campus - the savings over paying R&B is greater than the scholarship, including rent over the summer to work in the college town.

Some colleges gap, some gaps are huge.  Despite having EFC = 0, DD1's first choice college gapped her 50% of our family income!  She petitioned, but they just pushed more loans, then suggested she might be happier elsewhere.  She was very happy with her second choice, and we were even more so, since it was much closer to home.  DS2's experience went the opposite - his first choice aid package was good, but second choice package was better.  He called FA at first choice and said he really wanted to attend there, but aid was important, could they match other school's package?  They asked to see the offer, and they beat it!

[madamwitty]

It is important to distinguish tuition from student living expenses because for federal tax credits and deductions (AOTC, LLC, and tuition and fees deduction). only tuition and required fees are qualified educational expenses.
However, for the purposes of 529s, student living expenses (room and board) are also qualified educational expenses. This is why a 529 should always be used for living expenses first.
Also, it does not matter how much is incurred in living expenses. What can be claimed as tax free use of 529 funds is the greater of
1) room and board actually charged by the school
2) the school's cost of attendance (look under their financial aid figures) breakdown of room and board expenses. As noted by by teen persuasion, sometimes the figures are different for those living on campus, off campus, or at home.

Also, I would highly advise that you pay for at least $2000 of expenses out of pocket (not from a 529, and I'm pretty sure not from an IRA but that seems a bit unclear at this moment). The AOTC gives you a dollar for dollar credit for the first $2k in educational expenses. The AOTC also gives you a 25% credit for the next $2000 in expenses - so to get the maximum benefit pay at least $4k out of pocket.

johnny847: Thanks for the good reminder. I looked it up, LLC is a non-refundable credit (so not worth it if I wouldn't owe any tax anyway), but AOTC is refundable up to 40% of the credit or $1000, whichever comes first.

I don't see too much of a need to rebalance during college years - wouldn't you just rebalance by making withdrawals from the appropriate 529? Sure you'd be reducing the benefit of the stocks vs bonds 529 strategy, but having the asset allocation the way you want it is more important.
No idea if there is a limit on how often you can do partial rollovers. I'd imagine every state has different rules.

Um now that I think about it, rebalancing by rollovers between the two is going to lessen the benefit of this strategy isn't it? By rolling over money from the stocks 529 to the bonds 529, the stocks 529 will probably still have higher proportional gains than the bonds 529? If you could do specific identification of shares as in taxable accounts then maybe you could avoid this issue but as far as I know that's not possible in 529s.

But I think this strategy is still viable except for those who want to frontload their 529 savings. I'm assuming most people would make regular contributions to a 529 year after year. If this were true, you'd want to shift your asset allocation towards more bonds as the kid gets older anyway.

I'm one of those front-loaders. I am currently making regular contributions, but in a couple years I'll hit the funding level I'm estimating I'll need to grow into the right amount by the time the kids hit college. My youngest won't graduate college until ~16 years after I make my last planned contribution. (Wow, I never thought of it that way!) So the earnings component should be pretty big regardless of stocks or bonds.

Very few universities offer anything other than loans for living expenses.    Also, removing money from a traditional IRA for living expenses is also allowed, without penalty for a full time student.

Found a link supporting this: IRS Pub 970 Chapter 9 "Education Exception to Additional Tax on Early IRA Distributions"
http://www.irs.gov/publications/p970/ch09.html

Qualified education expenses.  For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.
  In addition, if the student is at least a half-time student, room and board are qualified education expenses.
  The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.

1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

(Emphasis mine.)

Seems like plenty of other posters have answered your actual questions. I just wanted to point out that universities typically "gap" between what the FAFSA determines for your EFC and what aid the school will offer. The family is expected to close that gap, and schools often point folks to PLUS loans and private loans. The gap is often shockingly big.

Cgbg: Thanks for stopping by to offer your thoughts. It's a good point to remember that the FAFSA EFC doesn't always tell the whole story.

I looked around the internet and found a great link offering statistics from 2007/2008 on unmet need (among many, many other things.) Rather than derailing this thread on financial aid strategies, I posted in another thread for those who are interested.

[madamwitty]

Teen persuasion: Thanks for the comprehensive reply!

The interesting things I found out while looking for rules about the 529 withdrawals: you can (and one site insisted, should) withdraw the amount of scholarships to get those funds out of the 529 w/o penalty (though I think gains are taxable income).  There is a similar penalty loophole if you claim the AOG - you would not be eligible for the credit using 529 funds, but it seems you can withdraw the amount used to qualify for the credit penalty free but gains taxable.  If you have loans to use for educational expenses, also withdraw funds up to that amount, again to get the funds out. You are mentally spending the 529 funds on college expenses, and the loans on other stuff.

If you have 529 funds in the amount of a college loan, can you just tell the college "no, thanks" on the loan so you can use the 529 directly for the qualified expenses? I always thought it was dumb you couldn't use 529 toward a student loan, and I wouldn't want to take on a loan I didn't need, anyway.

Some colleges gap, some gaps are huge.  Despite having EFC = 0, DD1's first choice college gapped her 50% of our family income!  She petitioned, but they just pushed more loans, then suggested she might be happier elsewhere.  She was very happy with her second choice, and we were even more so, since it was much closer to home.  DS2's experience went the opposite - his first choice aid package was good, but second choice package was better.  He called FA at first choice and said he really wanted to attend there, but aid was important, could they match other school's package?  They asked to see the offer, and they beat it!

Good for your kids!

It is also good to remember that, although many colleges offer packages with unmet need, you don't have to make the choice to go to that particular school.

[teen persuasion]

In theory you can turn down a loan, but sometimes that means turning down other aid, too.  For example, unsubsidized loans are increasingly replacing subsidized loans.  I suggested DS2 turn down a $1k unsubsidized loan, but FA insisted he could not keep the larger subsidized loan if he refused the unsubsidized portion. 

Loans are the first aid given to most students.  If you refuse the loans, they don't replace them with grants, it's take it or leave it. If you have enough 529 funds to cover/refuse loans, you don't need FA.

[madamwitty]

Loans are the first aid given to most students.  If you refuse the loans, they don't replace them with grants, it's take it or leave it. If you have enough 529 funds to cover/refuse loans, you don't need FA.

Haha, I suppose you're right. I haven't been through this yet so I am mostly thinking through this in the abstract, which means I sometimes ask questions of little practical application.

[Gin1984]

In theory you can turn down a loan, but sometimes that means turning down other aid, too.  For example, unsubsidized loans are increasingly replacing subsidized loans. I suggested DS2 turn down a $1k unsubsidized loan, but FA insisted he could not keep the larger subsidized loan if he refused the unsubsidized portion. 

Loans are the first aid given to most students.  If you refuse the loans, they don't replace them with grants, it's take it or leave it. If you have enough 529 funds to cover/refuse loans, you don't need FA.

That is not actually true, assuming these were federal loans, you probably got a bad FA person.  It is not uncommon.  It is actually how I got into learning about personal finance.  In fact, many good financial aid advisors recommend taking out the subsidized first, living on it and then if you need it, get the unsubsidized. It nothing else, it saves a bit of interest.  You are right that they won't replace them with grants, but you should be able to refuse the loans and keep the rest of your aid package intact.

[DoubleDown]

It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.

[johnny847]

It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.

[Emphasis mine]

Based on my college experience, I think it would actually hinder the process of making friends if a student does not live in the dorms in his/her freshman year. But, I went to a university where nobody commuted to school and I don't expect this to apply to a school with a decent commuter population.

Be very careful about the tax implications of renting to your kid at below market rate (as in, free). http://www.rontaxcpa.com/showtip.php?newsid=139. It becomes a rental property which you're also using personally!
And the relevant IRS section on this: http://www.irs.gov/taxtopics/tc415.html

It would be incredibly easy for them to say that you're not charging your kid a fair rental price: your kid's roommates are being charged more than your kid.

[Gin1984]

It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.

[Emphasis mine]

Based on my college experience, I think it would actually hinder the process of making friends if a student does not live in the dorms in his/her freshman year. But, I went to a university where nobody commuted to school and I don't expect this to apply to a school with a decent commuter population.

Be very careful about the tax implications of renting to your kid at below market rate (as in, free). http://www.rontaxcpa.com/showtip.php?newsid=139. It becomes a rental property which you're also using personally!
And the relevant IRS section on this: http://www.irs.gov/taxtopics/tc415.html

It would be incredibly easy for them to say that you're not charging your kid a fair rental price: your kid's roommates are being charged more than your kid.

Except your child could be on the house/mortgage to get you a lower rate on your mortgage (owner occupied and all that) plus if the child is taking care of the house as a live in property manager, you are allowed to charge less.  My old property manager got her entire rental "free" for managing the property.  One tenant on my current property gets a 10% discount for lawn care and general keep up.   

[johnny847]

It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.

[Emphasis mine]

Based on my college experience, I think it would actually hinder the process of making friends if a student does not live in the dorms in his/her freshman year. But, I went to a university where nobody commuted to school and I don't expect this to apply to a school with a decent commuter population.

Be very careful about the tax implications of renting to your kid at below market rate (as in, free). http://www.rontaxcpa.com/showtip.php?newsid=139. It becomes a rental property which you're also using personally!
And the relevant IRS section on this: http://www.irs.gov/taxtopics/tc415.html

It would be incredibly easy for them to say that you're not charging your kid a fair rental price: your kid's roommates are being charged more than your kid.

Except your child could be on the house/mortgage to get you a lower rate on your mortgage (owner occupied and all that) plus if the child is taking care of the house as a live in property manager, you are allowed to charge less.  My old property manager got her entire rental "free" for managing the property.  One tenant on my current property gets a 10% discount for lawn care and general keep up.

But then wouldn't the child have to be the one reporting the rental income, not the parent?

[Gin1984]

It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.

[Emphasis mine]

Based on my college experience, I think it would actually hinder the process of making friends if a student does not live in the dorms in his/her freshman year. But, I went to a university where nobody commuted to school and I don't expect this to apply to a school with a decent commuter population.

Be very careful about the tax implications of renting to your kid at below market rate (as in, free). http://www.rontaxcpa.com/showtip.php?newsid=139. It becomes a rental property which you're also using personally!
And the relevant IRS section on this: http://www.irs.gov/taxtopics/tc415.html

It would be incredibly easy for them to say that you're not charging your kid a fair rental price: your kid's roommates are being charged more than your kid.

Except your child could be on the house/mortgage to get you a lower rate on your mortgage (owner occupied and all that) plus if the child is taking care of the house as a live in property manager, you are allowed to charge less.  My old property manager got her entire rental "free" for managing the property.  One tenant on my current property gets a 10% discount for lawn care and general keep up.

But then wouldn't the child have to be the one reporting the rental income, not the parent?

No.  No more than my property manager has to report my rental income.  He does have to report the "income" of the discount though.

[johnny847]

It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.

[Emphasis mine]

Based on my college experience, I think it would actually hinder the process of making friends if a student does not live in the dorms in his/her freshman year. But, I went to a university where nobody commuted to school and I don't expect this to apply to a school with a decent commuter population.

Be very careful about the tax implications of renting to your kid at below market rate (as in, free). http://www.rontaxcpa.com/showtip.php?newsid=139. It becomes a rental property which you're also using personally!
And the relevant IRS section on this: http://www.irs.gov/taxtopics/tc415.html

It would be incredibly easy for them to say that you're not charging your kid a fair rental price: your kid's roommates are being charged more than your kid.

Except your child could be on the house/mortgage to get you a lower rate on your mortgage (owner occupied and all that) plus if the child is taking care of the house as a live in property manager, you are allowed to charge less.  My old property manager got her entire rental "free" for managing the property.  One tenant on my current property gets a 10% discount for lawn care and general keep up.

But then wouldn't the child have to be the one reporting the rental income, not the parent?

No.  No more than my property manager has to report my rental income.  He does have to report the "income" of the discount though.

Ah so either the kid would have to report as income the fair market value of the rent, or it'd be considered a gift?

[Gin1984]

It's a bit outside the discussion of Fin. Aid, but for student living expenses, one thing I'm considering doing is buying a rental property my kids can live in while going to college (at least in the later years, they'd probably like the dorms early on). If it's a decent rental market, it could be lucrative to buy a place, kid stays in one room, and rent the other rooms out to roommates. Kid can keep somewhat of an eye on the place to make sure it doesn't get totally trashed, especially since they'd likely be living with friends. After college is done, the place can hopefully be sold at some level of profit (or continue to hold it if cash flow is good enough).

Obviously would have to run the numbers on any purchase, but you're generally assured a steady pool of renters in a college town, and you can be choosy such as only renting to more responsible grad students. Since it would be operated as a business, everything would be deductible, etc., and meanwhile your child has a place to live without having to move in and out every year. With a good purchase, the kid's rent could likely be covered by the other renters.

[Emphasis mine]

Based on my college experience, I think it would actually hinder the process of making friends if a student does not live in the dorms in his/her freshman year. But, I went to a university where nobody commuted to school and I don't expect this to apply to a school with a decent commuter population.

Be very careful about the tax implications of renting to your kid at below market rate (as in, free). http://www.rontaxcpa.com/showtip.php?newsid=139. It becomes a rental property which you're also using personally!
And the relevant IRS section on this: http://www.irs.gov/taxtopics/tc415.html

It would be incredibly easy for them to say that you're not charging your kid a fair rental price: your kid's roommates are being charged more than your kid.

Except your child could be on the house/mortgage to get you a lower rate on your mortgage (owner occupied and all that) plus if the child is taking care of the house as a live in property manager, you are allowed to charge less.  My old property manager got her entire rental "free" for managing the property.  One tenant on my current property gets a 10% discount for lawn care and general keep up.

But then wouldn't the child have to be the one reporting the rental income, not the parent?

No.  No more than my property manager has to report my rental income.  He does have to report the "income" of the discount though.

Ah so either the kid would have to report as income the fair market value of the rent, or it'd be considered a gift?

For the FAFSA it does not matter if the money is a gift or earned.  The child still has to claim it and it effects next years FAFSA.