Scenario: I have a 529 established for my grandchild. The parent also created a 529 for the same child. Are there any issues, i.e. fines, penalties, taxes etc, if I transfer funds from my 529 to the parent-owned 529?
Thanks.
~Bruce
Hi, Bruce. The answer should be yes if you meet the qualifications. Check this out:
https://www.savingforcollege.com/article/ask-an-expert-how-c…
• You are permitted only one rollover to another 529 plan per twelve-month period for the same beneficiary.
• You are permitted to rollover a 529 plan to a family member of the beneficiary. There is no restriction on the number of times this can occur in any twelve-month period.
• The rollover must occur within 60 days of the distribution for the distribution to not be considered a taxable distribution.
• You can change the beneficiary of an existing 529 plan provided that the new or updated beneficiary is a member of the family of the old or previous beneficiary.
Fuskie
Who hopes this helps you with your understanding of 529s…
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IRaF00l2:“Scenario: I have a 529 established for my grandchild. The parent also created a 529 for the same child. Are there any issues, i.e. fines, penalties, taxes etc, if I transfer funds from my 529 to the parent-owned 529?”
You do not mention the size of the 529, but if I understand correctly you are considering transferring funds from a 529 account that you that benefits your grandchild to a 529 plan that your child would own for the benefit of your grandchild.
I am unsure whether this would be considered a gift to your child or whether it would not be a gift because it would still be for the benefit of the same grandchild. IF a gift, then depending on the amount, gift tax might be a potential issue.
Regards, JAFO
You are permitted the once a year transfer, but maybe you should do a bit of research 1st.
A 529 plan for a student that is owned by a parent or guardian will have to be disclosed on the FAFSA form to figure what the family will pay for college and what financial aid is given.
A grandparent holding the account keeps it out of the FAFSA until withdrawals are made. You don’t get a free pass but you can help to manage the FAFSA for the 1st 2 years of college and then use it for years 3 and or 4, etc.
The 529 can have some funds used for High School before college or later for Graduate work.
Laws can change on this so research it more. The last time I researched this is 4 years ago.
Aid is based on family income and assets. The 529 balance, and any other accounts owned by the student.
Multiple children attending college in the same year can also change the amounts.
This is just food for thought. No idea the amounts you are talking about, and the family income.
The higher the income the aid gets lowered a bit and the impact of what you do here matters less.
529’s can also have the student beneficiary changed to another relative if that is an option for You.
Talk to the parents so you can agree on the best path to take.
It’s great to be able to help with college costs this way.
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I have 5 grandchildren with 529s each with the grandchildren belonging to 3 parents. Two are of college age with one of them drawing from their 529. The youngest of the other 3 is 9 years away. The 3 parents are the successors of the 529s in case of my death. The 529s average $30-$40k right now.
By the time the youngest went to college I’d be in my 80s. My intent was to transfer the funds to the parent-owned 529s and let them administer it and I’d be out of the loop (too many other items on my plate.)
I thought about whether it would be a gift to the parent but couldn’t find a definitive answer on that. I didn’t consider the effect on financial aid - thanks for the heads up. Guess I need to have a talk with the kids.
Appreciate all your responses. Thank you much.
~ Bruce
I do not believe it would be considered a gift to the parent because regardless of whether the account is held by the parent or grandparent, it is for the benefit of the child.
Fuskie
Who does think the impact on financial aid is a compelling reason to consider an opposite approach, which would be the parent transferring their 529 account assets into the grandparents’ so as to improve the child’s chances for tuition assistance, though there are a number of other factors that should be considered along the way…
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CMF_Fuskie: “I do not believe it would be considered a gift to the parent because regardless of whether the account is held by the parent or grandparent, it is for the benefit of the child.”
I hear you, but I am still concerned that as the new owner (the parent) could elect to withdraw the funds, pay the penalty and use the funds as the parent wished (including, for example, a vacation trip for the parent and spouse). If my understanding is correct, I believe that would be enough incidents of ownership to constitute a gift from grandparent to parent even if grandchild is always the beneficiary.
Unlike an UGMA account, I do not think that the grandchild would have a claim if the parent pulled funds from the 529 account and used such funds for the parents’ benefit.
I know that when my in-law transferred 529 funds to us (spouse and me), we made sure that each transfer was less than the annual gift tax exclusion amount.
Properly timed, the funds never appeared on a FAFSA form - transferred after FAFSA filed and used by us (and not grandparent) before next FAFSA filing was due.
Regards, JAFO
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Properly timed, the funds never appeared on a FAFSA form - transferred after FAFSA filed and used by us (and not grandparent) before next FAFSA filing was due.
I had thought that withdrawals from 529 counted as income for the student - but apparently they don’t if it’s from a parent’s 529. (They are income for the student if directly from grandparent-owned 529)
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https://www.jhinvestments.com/viewpoints/college-saving/Does….
One potential drawback of grandparent 529 plans, however, is that they can affect financial aid eligibility. But, thanks to upcoming changes to the Free Application for Federal Student Aid (FAFSA), grandparents no longer have to worry about the “financial aid trap”.
529 accounts that are owned by a nonparent family member—such as a grandparent or aunt and uncle—aren’t counted as an asset on the FAFSA. However, withdrawals from the 529 are counted as student untaxed income, with up to 50% of the value affecting financial aid.
I am still concerned that as the new owner (the parent) could elect to withdraw the funds, pay the penalty and use the funds as the parent wished
That’s a whole different discussion. If you don’t trust the parents to manage their 529 in the best interests of their child, then you should consider that risk before placing the money in their care.
Remember, while you the account holder does get tax benefits, a 529 plan is essentially giving money to the stated beneficiary for a specific, targeted purpose. The account holder is basically a custodian of that money. That is why there are penalties if they abuse that responsibility for personal reasons or benefit.
Not to add to your worries, but it is also possible that the parent could change the named beneficiary for their 529 account to someone else. For example, say a parent has children from a previous marriage, they could change the beneficiary from the child that is in your bloodline to a child from that first relationship. As a grandparent, you won’t have control over how the parent uses the money.
Fuskie
Who notes the tax consequences for how they use the money becomes there problem once you consolidate accounts under their name, just as it would be completely under your control if they were to transfer their assets into your account, and they might have equal concerns that you might change the beneficiary to another grandchild…
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CMF_Fuskie:
<<<I am still concerned that as the new owner (the parent) could elect to withdraw the funds, pay the penalty and use the funds as the parent wished>>>
“That’s a whole different discussion.”
Yes, and not my point.
“If you don’t trust the parents to manage their 529 in the best interests of their child, then you should consider that risk before placing the money in their care.”
And not an issue I raised. I was (and am) solely discussing whether it is a gift from the grandparent to the parent.
“Remember, while you the account holder does get tax benefits, a 529 plan is essentially giving money to the stated beneficiary for a specific, targeted purpose. The account holder is basically a custodian of that money. That is why there are penalties if they abuse that responsibility for personal reasons or benefit.”
None of which has anything to do with my concern.
“Not to add to your worries, but it is also possible that the parent could change the named beneficiary for their 529 account to someone else. For example, say a parent has children from a previous marriage, they could change the beneficiary from the child that is in your bloodline to a child from that first relationship. As a grandparent, you won’t have control over how the parent uses the money.”
And your last sentence is why am I concerned that it is a gift to the parents from the grandparents.
Your response is tangential to my concerns and has nothing to do with whether one trusts the parents.
Regards, JAFO
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For what it’s worth, there has been some discussion threads about 529 transfers on other financial forums. The final “answer” seems to be that no one knows how some transfers are considered with regard to gift tax rules. The 529 is a unicorn. The “owner” is sometimes considered the owner but sometimes the beneficiary is considered the owner. My guess is that the $80Billion of new money designated for the IRS will cause them to look at this carefully and there will be test cases that reach tax court. But it could take years for all the dust to settle.
The “owner” is sometimes considered the owner but sometimes the beneficiary is considered the owner.
I know noting about 529 accounts and I am not a tax lawyer anyway.
I did open a UGMA account with my broker for the newborn daughter of some friends of mine. It was entitled
MyName, trustee(?) FBO HerName.
From which I infer that the broker considered it hers, but only I had authority to manage it for her until she reached 21 (in my state: 18 in some other states).
So if tax laws were logical and consistent (pause here for you to get over your laughter), that should apply to 529 accounts as well.
The “owner” is sometimes considered the owner but sometimes the beneficiary is considered the owner.
I know noting about 529 accounts and I am not a tax lawyer anyway.
I did open a UGMA account with my broker for the newborn daughter of some friends of mine. It was entitled
MyName, trustee(?) FBO HerName.
From which I infer that the broker considered it hers, but only I had authority to manage it for her until she reached 21 (in my state: 18 in some other states).
So if tax laws were logical and consistent (pause here for you to get over your laughter), that should apply to 529 accounts as well.
The rules aren’t the same. You can’t change the beneficiary of a UGMA account. You can change the beneficiary of a 629 plan.
Ira
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Argh!
529, not 629.
Ira
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Argh!
529, not 629.
Ira
Kinda reminds me of during the financial crisis of 2008-9 when my 401K became a 201K.
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Kinda reminds me of during the financial crisis of 2008-9 when my 401K became a 201K.
Yeah but Ira’s figure was a “typo”, not so much the 2008 201k’s 
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