How does 529 work?# NextGeneration - 我爱宝宝
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The first wrong conception that most people have is that: if the kids
have the 529, they could not get financial aid. The formula to
calculate the financial aid includes: parents asset, 529, and income.
The income plays more important factor than the others. Usually the 5%
of asset and 529 are calculated to offset the needs of the financial
aid. It doesn’t hurt to have a 529 otherwise the money under 529 is
probably in the saving account or other kinds of assets.
Some people are afraid that if the kid gets the scholarship, the money
in 529 gets wasted. It is not true either. Even if the kid gets
scholarship, the kid still can draws the money out of 529. For the
amount that matches the scholarship part, one pays income tax on the
growth part and there is no penalty. Considering the kid’s income is
not high, tax rate should be fair. For example, the total cost of
tuition fee, living expenses etc is 60k and the scholarship is 40k
(30k is for tuition fee waver, 10k as cash). For the first 20k from
529 withdrawn, one doesn’t pay any tax. For the next 40k withdrawn,
one pays income tax. The kid’s income could be 10k + 40k/2(it depends
on the growth of the 529 portfolio, I assume 100% growth here). The
tax rate 30k should be much lower than the parents tax rate if parents
are both working professionals.
Assume one set up a broker account instead of 529. The deposit is 100k
and grows to 200k. When one gets money out to pay the kid’s tuition,
the tax rate is for the long term capital gains for the growth of
100k.
If the account is a 529 account and the kid doesn’t have any financial
aid or scholarship at all, one pays no tax on 100k at all. It is hard
for middle class to get financial aid, and also most college provides
loan instead of cash as the financial aids.
If the account is a 529 account and the kid gets FULL scholarship,
when withdraw the money, the kid needs to pay income tax on 100k. The
kid’s income is at most of the double of the living cost. As today, it
is around 40k. Getting full scholarship is less than 1%.
Also if one is rich, 529 will never hurt. As inheritance tax is very
high for over 3M assets. Only if one is very confident that the kids
can get full scholarship or financial aid in cash, having a 529 with
fair amount of money doesn’t hurt at all.
Also, if one's income is high enough to pay the tuition when the kids
are going to school, the 529 may not be needed. As one doesn't need to
withdraw money from other assets.
Some reference:
http://www.stratagee.com/resources/efc_quick_reference/1213_efc
reference.html
http://www.ohe.state.mn.us/mPg.cfm?pageID=1334
http://www.savingforcollege.com/intro_to_529s/does-a-529-plan-a
financial-aid.php
have the 529, they could not get financial aid. The formula to
calculate the financial aid includes: parents asset, 529, and income.
The income plays more important factor than the others. Usually the 5%
of asset and 529 are calculated to offset the needs of the financial
aid. It doesn’t hurt to have a 529 otherwise the money under 529 is
probably in the saving account or other kinds of assets.
Some people are afraid that if the kid gets the scholarship, the money
in 529 gets wasted. It is not true either. Even if the kid gets
scholarship, the kid still can draws the money out of 529. For the
amount that matches the scholarship part, one pays income tax on the
growth part and there is no penalty. Considering the kid’s income is
not high, tax rate should be fair. For example, the total cost of
tuition fee, living expenses etc is 60k and the scholarship is 40k
(30k is for tuition fee waver, 10k as cash). For the first 20k from
529 withdrawn, one doesn’t pay any tax. For the next 40k withdrawn,
one pays income tax. The kid’s income could be 10k + 40k/2(it depends
on the growth of the 529 portfolio, I assume 100% growth here). The
tax rate 30k should be much lower than the parents tax rate if parents
are both working professionals.
Assume one set up a broker account instead of 529. The deposit is 100k
and grows to 200k. When one gets money out to pay the kid’s tuition,
the tax rate is for the long term capital gains for the growth of
100k.
If the account is a 529 account and the kid doesn’t have any financial
aid or scholarship at all, one pays no tax on 100k at all. It is hard
for middle class to get financial aid, and also most college provides
loan instead of cash as the financial aids.
If the account is a 529 account and the kid gets FULL scholarship,
when withdraw the money, the kid needs to pay income tax on 100k. The
kid’s income is at most of the double of the living cost. As today, it
is around 40k. Getting full scholarship is less than 1%.
Also if one is rich, 529 will never hurt. As inheritance tax is very
high for over 3M assets. Only if one is very confident that the kids
can get full scholarship or financial aid in cash, having a 529 with
fair amount of money doesn’t hurt at all.
Also, if one's income is high enough to pay the tuition when the kids
are going to school, the 529 may not be needed. As one doesn't need to
withdraw money from other assets.
Some reference:
http://www.stratagee.com/resources/efc_quick_reference/1213_efc
reference.html
http://www.ohe.state.mn.us/mPg.cfm?pageID=1334
http://www.savingforcollege.com/intro_to_529s/does-a-529-plan-a
financial-aid.php
