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529 Savings Plans, Trick or Treat?

College financial aid officers across the county must be in a state of euphoria now that Congress has made the 529 tax exemption permanent. Adding to their joy is the increasing number of states making contributions to 529 accounts state tax deductible. Sadly, this will only encourage more unsuspecting families to set up these plans which will take most of them down a path paved with financial hazards. Ultimately, any family who opens one is inviting devastating consequences when the financial aid process begins and withdrawals are taken.Colleges are likely to count their blessings for every needy student who has a 529. Such plans make it possible for the school to reduce financial aid awards dollar for dollar thereby enriching their billion dollar endowment funds.In the financial aid formulas, students have no asset protection allowance (APA). The sad result is, each year students lose 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 better as their assets are assessed at only 5.6% per year over their allowance. 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 share of the students aid, dollar for dollar! The assessment is avoided when the owner of the account is not part 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.Solution: Once a family becomes aware they will qualify for need-based financial aid, and that all of their 529 monies are at risk of being assessed and worse, it is not too late and very easy to liquidate the account. The owner must contact the company managing their account and indicate they want a non-qualified (taxable) distribution. They will receive a redemption form and their check will follow shortly after the form is submitted.Of course, liquidation is not without consequence either. All gains are subject not only to a 10% penalty tax, but also the applicable income tax based on the account owners tax bracket. Nonetheless, it is certainly the far lesser evil.Example: 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 gain is subject to a $1,000 penalty tax, plus a $2,000 income tax. While many families have as much as $100,000 and more, the net result here is $47,000 that would avoid 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 time!Here are two actual examples of what can be accomplished when assets are legally repositioned:$15,252 Princeton University Tuition $18,030 Financial Aid Received $ 2,000 University of Tampa aid eligibility $28,215 Aid increased after repositioningWhen confronted with these facts, financial aid officers nationwide have sidestepped and smoke-screened the issue with comments such as, Depending upon the value, there will be annual distributions to pay for tuition and fees, or, Our calculations may vary from year to year, and this most disturbing remark originating from a prestigious New England school, 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 issue! Camouflaging this fact is unconscionable, but par for the course when playing the game that todays college financial aid process has become.The following illustrates exactly how 529 Savings Plans cause families to lose thousands in financial aid.In a 2 parent family, lets assume: an older parent of 44; 1 child, 17; AGI of $68,900; taxes paid $5,500; parent assets of $10,000; asset protection allowance of $42,100; student assets of $124:Scenario A: $0 in a 529 Savings Plan1. Cost of Attendance: $ 45,000 (COA = tuition, fees, room

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