Strategy for using 529 - as soon as possible or hold for later?

xuicholti 2016-12-03 16:37:27 UTC #1

What information do I need in order to make the decision as to when I should use the 529? I have to cash in some mutual funds for some portion of my child's tuition at some point during his 4-years (currently a Sophomore) and will use 529 funds as well. Is there a reason to use all the 529 early and the mutual funds later or vice versa? We do have to fill out a CSS each year. I've paid using mutual funds for the first 3 semesters & will have to decide in the next couple of weeks about which to use for the next semester.

Brian_Boswell_SFC 2016-12-05 23:29:06 UTC #2

Greetings xuicholti:

For accounts owned by the parent or student, it is typically best to withdraw 529 assets sooner rather than later to lock in the tax benefit. The future is uncertain, so if there are qualified expenses today, usually you'll want to reimburse those expenses to ensure you're taking advantage of those 529 benefits.

That said, I don't know your financial situation in detail. You should definitely reach out to the financial aid office of the beneficiary's school, though, to understand how their school will view the source of funds, and whether it will have an impact on their aid package.

Good luck,

Brian Boswell
VP, Research & Development

This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.

xuicholti 2016-12-06 00:45:10 UTC #3

Is there a different strategy if the 529 is from a grandparent?

Brian_Boswell_SFC 2016-12-06 16:53:49 UTC #4

For accounts owned by a grandparent or third-party, it might be better to defer withdrawals to later years depending on what aid is being received by the beneficiary, and how the disbursement is treated by the recipient school. Unlike parent- or student-owned accounts, withdrawals will count as student income on the FAFSA for the tax year in which the withdrawal is made. This can have a dramatic impact on the EFC (expected family contribution) once that tax year is used for financial aid reporting (typically two years later).

Good luck,

Brian Boswell
VP, Research & Development