This is episode 16, and today we are answering the question, Should You Put A 529 Plan In A Childs Name?
529 Plans have become one of the preferred college savings options over the last decade. They offer so many benefits not only in heir tax treatment, but also in their ability to change over time to fit the needs of investors and many are now FDIC Insured, just like a bank account.
Given the ease with which you can buy a plan in many states without a broker, we often forget some of the small details that can make or break your child’s ability to still receive more financial aid while in college. So when parents ask me, I always tell them the same thing…
Never put the 529 plan in the child’s name, and here’s why
It belongs to them, so they control it!
Putting an account in a child’s name allows that child to take control of it at 18 without conditions. While the withdrawals are tax-free if spent in qualified educational expenses, there is nothing stopping your son or daughter from buying a car instead. Keeping the plan in your name allows you to control its use.
529 Plan’s can be used on other children!
By keeping a plan in a parents name, you can use it on any child in the family, or even a spouse. Let’s say Junior doesn’t want to attend college, but mom does. The tax treatment is the same.
Parents have more asset and income protection on the FAFSA in the EFC calculation than dependents do!
Parents enjoy a much more favorable asset protection rate when filing the FAFSA
when a 529 plan is in a parents name and under parental control. Parents of students have their assets counted in the EFC formula at a maximum rate of 5.64%. At the same time, junior’s assets are counted at 20% when income exceeds $6K!
So by keeping the plan in the parents name, families have maximum control and the most favorable tax and EFC treatment overall. The fact that 529 plan’s are transferable between family members and students as long as the money is spent on the wide range of educational expenses permitted, makes putting the plan in the parents name the safest and best option.
The College Money Man Podcast, and JR’s Two Minute Tips are available for subscription for FREE via iTunes, and Stitcher. New episodes of 2-Minute Tips are released everyday Monday thru Friday, and our weekly broadcast is released each Wednesday. Subscribe, like, and comment! Download and get your dose of financial aid help on the go.