Author Topic: Existing 529 Account-Transfer Ownership to Child?  (Read 891 times)

afuera

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Existing 529 Account-Transfer Ownership to Child?
« on: March 11, 2021, 12:18:59 PM »
Hello All,
We recently had a baby and my parents want to gift my newborn with an existing 529 savings account in my parents name that already has about $10K in it.  What is the best way to handle this account?  My parents want to know if strategically it makes more sense to leave the account in their name, to put in my husbands/my name or to put it in my child's name.  Also what is the best method for transferring ownership if it makes more sense to transfer ownership out of my parents name.
My husband and I do plan on being FIRE long before my child would use the 529 account for college and would like to try and stay in the lowest tax bracket possible during drawdown (currently relying on Mega Backdoor Roth during accumulation phase for this).
Appreciate any help and input!


YttriumNitrate

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Re: Existing 529 Account-Transfer Ownership to Child?
« Reply #1 on: March 11, 2021, 01:14:02 PM »
Well, under the current FAFSA rules, 529 plans owned by grandparents are not counted in the financial aid calculation while 529 plans owned by parents are. I believe the CSS Profile asks for grandparent's assets. Of course, 18 years is a long time. The rules can change and depending on your parents' ages the question of whether to keep the 529 plan in their names may be a moot point.

secondcor521

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Re: Existing 529 Account-Transfer Ownership to Child?
« Reply #2 on: March 11, 2021, 03:26:40 PM »
Under current rules, it doesn't matter if the account is in your name or your child's name - in either case it would be treated as a parental asset.  If the account were in the grandparents' name, then it would not be listed on the FAFSA, but distributions from the 529 would be treated as tax-free income to the child in the year they were made, so the general rule of thumb was to wait until the child was a junior in college before using grandparent 529 funds (when possible).

They've just passed an overhaul of the FAFSA rules - google "FAFSA simplification" to read up on them - so everything in the previous paragraph is really not relevant after this year.

As a practical matter, the biggest factor is whether your parents or you can get a state income tax deduction for any contributions to the account, and which state 529 plan is involved may affect that if you and your parents live in different states.  So if your parents are going to make contributions and they get a state tax deduction and it has to be to a 529 in their state, then they might just want to keep it in their name while they do that.  If you're going to be the ones making most of the contributions and your state's rules say it has to be a 529 in your state, then it might make sense to either open your own 529 account (kids can have multiple 529s - my kids did for a while) or roll your parents' account over into your state plan.

If your parents might pass away or if you and your partner were headed for divorce, then as an administrative thing it might matter if the accounts were in your parents name or your name.

Transferring - if you decide that's what you want to do - is just a matter of calling up the 529 plan and changing the custodianship.  It's not hard, they'll have a form to fill out, and there's really no best/worst way to do it.

Distributions from 529s for qualified educational expenses won't have any impact on your taxes.  Although if it's still around when your kid goes to college, you might consider paying for the first $4K of expenses out of pocket and claiming the American Opportunity Tax Credit, which currently would save you between $1,000 and $2,500 on your federal income taxes.

DaMa

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Re: Existing 529 Account-Transfer Ownership to Child?
« Reply #3 on: March 15, 2021, 11:27:09 AM »
I have 529s for my grandchildren- one for each (3)  The accounts are in my name and are tax deductible in the state of Michigan.  There is a transfer of custodian to the parent (my child) in event of my death on each account. 

As to FAFSA issues...that's a long way off, and I can make changes when it gets closer.  My oldest grandson is 5.