FAFSA/When to cash in mutual fund

parent,
I'm not qualified to give you an expert opinion on your financial matters, so don't get too upset at me if I end up costing you thousands of dollars.
Anyway I will try to offer some friendly advice to think about. Keep in mind that the FAFSA for 2008 is based largely upon the tax return for 2007. The MF you've mentioned has to be reported by either parents or son, as would the income (taxable) if it's sold. I really don't know how FAFSA calculates investment holdings. There are a few approaches that you might want to consider. One is to give him the MF, claim him as a dependent, and try to get a number on your expected contribution to cost of attendance. Or you can report the MF as yours. Both of these approaches likely reduce his eligibility for need based FA, and puts the biggest burden on the parents. The other is to not claim him and have him file his own return for the FAFSA. He'll possibly be eligible for a Pell Grant in addition to more subsidized loan money, whereas you may not.
Anyway, your best bet is to contact the school FA office and/or a good CPA that understands FA and get specific answers to your question, and a figure for your expected contribution. Then you can come back here and educate us all.

Spizzlepop, thanks so much for the information. I found out one thing from www.marketwatch.com that is helping us make our decision and that others may want to take into consideration before the end of the year:

Watch out for changes to the "kiddie tax." Are you a high-net-worth individual accustomed to keeping some of your investment income in your child's name so it will be taxed at a lower rate? You should be aware that the rules governing the kiddie tax are set to change in January. At the moment, children under 18 with investment income or other "unearned" income in excess of $1,700 get taxed at their parent's rate. Next year, this rule will apply to children under 19 and full-time, dependent students under 24. If you have a child between the ages of 18 and 23 who is holding some of your unearned income, Franklin suggests selling before the end of year while the child can still take advantage of a 5% rate on long-term capital gains for taxpapayers in the two lowest tax brackets.

FAFSA is calculated based on assets and income for the tax year before your son enters college. The student's freshman year award is based on income and assets measured after Jan 1 of the junior year in high school. At this point, it does not matter what you do with the mutual fund, because it is going to be counted against you. The mutual fund, sold or unsold, still counts as assets. According to the article I have (E. D. Cook, "Navigating the Muddy Waters of College Financial Planning", Practical Tax Strategies, vol 69, 2002.), parents assets are a counted at a rate of 5.6%, but student's assets are counted at a rate of 35%. Since your son's name is on the mutual fund, it will count as roughly $4550 against financial aid.

The bottom line is don't put a lot of money in your kid's name if you want to get financial aid. FYI, FAFSA calculations do not include grandparents assets or income.

quote:

Originally posted by spizzlepop:
One is to give him the MF, claim him as a dependent, and try to get a number on your expected contribution to cost of attendance.

NO, NO!

The FAFSA requires a higher percentage contribution from the student's assets than from the parents' assets. Also, as was mentioned, there are income tax considerations to investigate.

If I am not mistaken, you are better keeping the asset as a MF (non-liquid) than as cash.

Do a google search on FAFSA calculators. Run the calculator using Four scenarios:
1. The MF is put in your son's name.
2. The MF is left in your name and not cashed out.
3. The MF is left in your name and is cashed out before year end.
4. The MF is cashed out, but the proceeds are used to buy a car instead of going into your savings.

Then compare the EFC for each scenario.

That will be your best bet, aside from paying a CPA who is up on this topic.

I do believe that assets held in a tax-deferred account (i.e 401K) - are not included in the calculation of parental assets.