529 Savings Plans, Trick or Treat?
Posted by ~Ray @ 2007-10-23 15:21:47
College financial aid officers across the county must be in a express of euphoria now that Congress has made the 529 tax exemption permanent. Adding to their joy is the increasing be of states making contributions to 529 accounts express tax deductible. Sadly this will only back up more unsuspecting families to set up these plans which will take most of them drink a path paved with financial hazards. Ultimately any family who opens one is inviting devastating consequences when the financial aid affect begins and withdrawals are taken.
Colleges are likely to ascertain their blessings for every needy student who has a 529. Such plans alter it possible for the educate to decrease financial aid awards dollar for dollar thereby enriching their billion dollar endowment funds.
In the financial aid formulas students undergo no asset protection allow (APA). The sad result is each year students suffer 20 cents in financial aid for every dollar they have in cash checking savings. UGMA and/or UTMA accts. stocks bonds savings bonds mutual funds and the like.
Parents fare exceed as their assets are assessed at only 5.6% per year over their allow. A two parent family for example with an older parent of 48 has an APA of $45,000 while a single parent of 45 only has $19,700.
It gets even worse for families who are eligible for need-based financial aid. Colleges deem this money a resource and apply the asset assessment. Next they reduce some of their own overlap of the students aid dollar for dollar! The assessment is avoided when the owner of the be is not move of the family household i e a grandparent but the colleges aid is still reduced.
Unfortunately tens of millions of dollars per year are unnecessarily wasted by college families who are unaware of the consequences when setting up 529 Savings Plans. In fact numerous brokerage firms have been sued and/or suspended for misrepresenting the so-called benefits of 529 accounts.
: Once a family becomes aware they ordain qualify for need-based financial aid and that all of their 529 monies are at assay of being assessed and worse it is not too late and very easy to liquidate the be. The owner must communicate the company managing their be and indicate they want a non-qualified (taxable) distribution. They will acquire a redemption form and their analyse ordain go shortly after the create is submitted.
Of course liquidation is not without consequence either. All gains are affect not only to a 10% penalty tax but also the applicable income tax based on the be owners tax bracket. Nonetheless it is certainly the far lesser evil.
: A family who invested $40,000 and had a $10,000 gain would receive a check upon liquidation for $50,000. Assuming a 20% tax bracket the $10,000 obtain is subject to a $1,000 penalty tax plus a $2,000 income tax. While many families undergo as much as $100,000 and more the net prove here is $47,000 that would forbid a maximum of $10,500 ($47,000 x 5.6% x 4) in assessments. If the money were legally repositioned into financial vehicles not included in the financial aid calculations some or all of it would still be there at graduation measure!
When confronted with these facts financial aid officers nationwide have sidestepped and smoke-screened the issue with comments such as. Depending upon the value there ordain be annual distributions to pay for tuition and fees or. Our calculations may vary from year to year and this most disturbing say originating from a prestigious New England educate. Financial aid is not the issue here. Paying for the students education is.
Since the majority of American families can no longer afford four years of tuition and related expenses without financial aid it most certainly is the air! Camouflaging this fact is unconscionable but par for the course when playing the bet that todays college financial aid process has change state.
(A) $ 3,500 Stafford Loan (B) $ 4,000 Perkins Loan (C) $ 2,500 Federal work-study allocate (D) $ 3,000 State grants etc. (E) $ 2,000 Private scholarship (F) $20,000 College scholarships grants tuition waivers etc. (G) $35,000 Total
The student will answer for a maximum of $20,000/yr in financial aid from the college. However the private scholarship is a bonus for the educate not the student. It enables them to reduce their aid dollar for dollar because if (E) were $0. (F) would be $22,000.
(A) $ 3,500 Stafford Loan (B) $ 4,000 Perkins Loan (C) $ 2,500 Federal work-study award (D) $ 3,000 express grants etc. (E) $21,000 College scholarships grants tuition waivers etc. (F) $34,000 Total
With $50,000 in the 529 Savings Plan the family will most likely act a qualified distribution of $12,500/yr for 4 years; $11,000 of which ordain pay their EFC. The college saves and the family will lose $1,500/yr in financial aid for 4 years. The colleges contribution (E) will now be reduced to $19,500
The college ordain save and the family ordain suffer $12,200/yr in financial aid because $12,200 of the aid the college would.[ADVERTHERE]Related article:
http://rabbit35703.blogspot.com/2007/09/529-savings-plans-trick-or-treat.html
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