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Author Topic: 529 for non-parent/child  (Read 576 times)

MaggieD

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529 for non-parent/child
« on: July 08, 2020, 02:57:47 PM »
Hello,

I have tried to research this, but would like to verify with some smart folks here that I’m on the right track.  I am considering opening a 529 for a non-child family member. 

I believe I am still eligible for the state tax deduction and tax free growth, same as if this was for a child of mine.

However, I think the key difference is for college funding, it counts as income in the EFC formula, so it would be best to use this on the family member’s final year to not mess up anything in their aid/parental payment package.

Any comments on whether I have this correct?

Thank you!
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seattlecyclone

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Re: 529 for non-parent/child
« Reply #1 on: July 08, 2020, 05:07:48 PM »
The state tax treatment will depend on your state of residence.

You're right about the tax-free growth, and that this money is often best applied to tuition later in the student's program, after they've submitted their last FAFSA.
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secondcor521

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Re: 529 for non-parent/child
« Reply #2 on: July 08, 2020, 09:36:42 PM »
Agree with seattlecyclone's response.

One additional comment, which is that for FAFSA purposes, a withdrawal from your 529 for such a student is considered tax-free income to the student in the year of the withdrawal, and as such is highly "taxed" by the FAFSA formula.

But, the income tax portion of the FAFSA is based on income taxes from what's called the "prior prior year" now.  So let's say that the student is already in school and you made the withdrawal for them from the 529 this year (2020).  It would affect the FAFSA that they file next year in the fall of 2021, for the 2022-2023 school year.

So working backward, you could use the 529 as early as January of their junior year (or penultimate year of their program) and it wouldn't affect FAFSA-based financial aid.
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MaggieD

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Re: 529 for non-parent/child
« Reply #3 on: July 10, 2020, 08:14:22 AM »
Thanks for the confirmation, and that it sounds like we could even use some of it spring semester junior year if their FAFSA has already been filed.  We haven’t decided what our plan is yet, and if we do decide to move forward it will probably be something we don’t even tell the kids/parents about for some time, but good to have the information about this option.
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