FAQs: Other common questions
- Financial aid
- What impact does a 529 plan have on eligibility for federal financial aid?
- Estate tax treatment
- What are the estate tax benefits of a 529?
- UGMA/UTMA accounts
- Can I open a Direct Plan account with the money from an UGMA/UTMA account?
- Who is considered the owner of the UGMA/UTMA 529 account assets?
- Will I be able to change the beneficiary of this UGMA/UTMA 529 account?
- PATH Act of 2015
- What is the Protecting Americans from Tax Hikes (PATH) Act of 2015?
- When are expenses for computers considered qualified?
- What are the tax rules for recontribution of qualified higher-education expenses?
- Whom can I consult regarding my specific situation as it relates to the PATH Act?
What impact does a 529 plan have on eligibility for federal financial aid?
529 plan assets are counted at different rates for the Expected Family Contribution (EFC) in the Free Application for Federal Student Aid (FAFSA) formula. The guidelines are as follows:
- If the student is a dependent, a 529 plan account is considered the parent's asset (if the account is owned by the student or the parent of the student). As a result, it will generally be counted at a rate of up to 5.64% of its value for the EFC.
- If the student isn't a dependent and is the account owner, the 529 plan account is treated as the student's asset and is generally factored into the EFC at the higher rate of 20%.
- In other cases (such as with a grandparent), the account doesn't count as an asset for federal financial aid purposes. (However, a student may have to report distributions received from the account as income for these purposes.)
Note: Financial aid programs offered by educational institutions and other nonfederal sources may have their own guidelines for the treatment of 529 plan accounts.
For complete information about financial aid eligibility, you should consult with a financial aid professional and/or the state or educational institution offering a particular financial aid program, since rules and regulations often change.
Estate tax treatment
What are the estate tax benefits of a 529?
Money you contribute to a 529 account is generally treated as a completed gift to your beneficiary, but as the account owner, you'll still have control over it. If you die with money remaining in your account, it won't be included in your estate for federal estate tax purposes.
However, if you took advantage of the option to treat a single $75,000 contribution ($150,000 for married couples) to a 529 plan account as if it was made over five years, and you die within five years of contributing, a prorated portion of the contribution will be subject to estate tax.
For more information, consult your tax advisor or estate planning attorney.
Can I open a Direct Plan account with the money from an UGMA/UTMA account?
As the custodian for a minor under the Uniform Gifts/Transfers to Minors Act (UGMA/UTMA), you may be able to open a Direct Plan account using custodial assets previously held in the UGMA/UTMA account, subject to the laws of the state where you opened the UGMA/UTMA account. As custodian, you'll act as the account owner. There are special rules that apply to UGMA/UTMA accounts, and you should consult your tax advisor before transferring assets from an UGMA/UTMA.
Who is considered the owner of the UGMA/UTMA 529 account assets?
The custodian acts as the account owner. When the custodianship terminates, the beneficiary is legally entitled to take control of the account and may become the account owner.
Will I be able to change the beneficiary of this UGMA/UTMA 529 account?
No. A custodian account owner can't select a new beneficiary (directly or by means of a rollover), except as permitted under UGMA/UTMA guidelines.
You should make additional contributions of money not previously gifted to the beneficiary under the UGMA/UTMA account to a separate, noncustodial account. This will allow you to retain control of the separate account after the custodianship terminates.
PATH Act of 2015
What is the Protecting Americans from Tax Hikes (PATH) Act of 2015?
On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 (the "PATH Act") was signed into law. The PATH Act introduces various improvements to the tax treatment of 529 plans for tax years beginning after December 31, 2014. Among other changes, the new rules consider computers as qualified expenses and allow account owners to recontribute refunded amounts from qualified higher-education expenses without incurring taxes.
When are expenses for computers considered qualified?
Expenses for the purchase of computers or peripheral equipment (e.g., printers), computer software, or internet access and related services that are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution are now included in the definition of qualified higher-education expenses. A distribution from a 529 plan account to pay for these expenses generally won't be subject to federal income tax.
What are the tax rules for the recontribution of qualified higher-education expenses?
When given a refund from an eligible educational institution of money paid out of the beneficiary's 529 plan account for qualified higher-education expenses, account owners can recontribute that money into the same or another 529 account for the same beneficiary. There won't be any federal income taxes or penalties associated with recontributed refunds as long as the refund is recontributed within 60 days of being received, and the recontributed amount doesn't exceed the amount of the refund.
Whom can I consult regarding my specific situation as it relates to the PATH Act?
Account owners are encouraged to consult their tax advisors with questions about how these improvements and other PATH Act changes might impact their individual situations.