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Strategies for Using 529 Funds

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Replies to: Strategies for Using 529 Funds

  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    edited March 8
    So 2nd yr we moved money into our account and then paid it to school which alleviated the stress( at least that worked), but when it was all said and done listing that as income and then listing college expenses ended up costing approx 400 in extra taxes.

    If the distribution from the 529 was placed in your account and that money was used for a subsequent payment to the school for qualified expenses, and if those events happened in the same tax year, none of the 529 money should have been considered taxable income.
  • RW1RW1 Registered User Posts: 114 Junior Member
    Okie Dokie, Since I just paid the bill, I disagree (now my verbage may be wrong on "income" but it does have to go on the tax forms as well as expenses and as your "other" income rises you lose some major advantages and can even take a financial hit as listed above.
  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    Okie Dokie, Since I just paid the bill, I disagree (now my verbage may be wrong on "income" but it does have to go on the tax forms as well as expenses and as your "other" income rises you lose some major advantages and can even take a financial hit as listed above.

    No. If you took a 529 distribution in 2018 and in 2018 an amount equal to or greater than that 529 distribution was used to pay qualified expenses for the 529 beneficiary, generally none of the 529 money is reported on any tax form. I say generally because there can be exceptions to this. For instance, you may want to claim that $4k of the 529 was not qualified so that you can take the AOTC, and in that case the earnings portion of that $4k part of the 529 distribution would be subject to tax (but not the 10% additional tax).
  • RW1RW1 Registered User Posts: 114 Junior Member
    Ill let my accountants know.
  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    edited March 8
    Ill let my accountants know.

    Do you think your accountants are under the impression that the earnings portion of a qualified 529 distribution is tax-deferred and not tax-free?
  • RW1RW1 Registered User Posts: 114 Junior Member
    Ok ....The answer I got "Yes, you do have to report 529 withdrawals (they are reported on form 1099-Q) to show to the IRS that the amount is nontaxable because you spend it for qualified education expenses. Qualified education expenses for the purposes of the 529 plan distributions includes room and board, books tuition and fees Scholarships/grants are applied to *qualified* education expenses ONLY. Those qualified expenses are tuition, books and lab fees. That's it. (though the definition of lab fees is rather broad). After that, any excess scholarship money is taxable income to the student. Grants/scholarships can NOT be used for room and board.
    Next, 529 funds reported on the 1099-Q are applied. First to any tuition not covered by scholarships. Then it's applied to the unqualifed but "allowed" expense of room and board
  • RW1RW1 Registered User Posts: 114 Junior Member
    The allowed expense of room and board was the issue and the type of residence D is staying in.
  • homerdoghomerdog Registered User Posts: 4,183 Senior Member
    OK. Here's a really dumb (but at least straight forward) question. Can we direct the 529 plan to just pay the school directly? Or is the protocol to always withdraw the amount you want into your checking account and then pay?
  • RW1RW1 Registered User Posts: 114 Junior Member
    However, I am told that if I have released directly to university in future this will not be reported to me and I will have no tax liability.
  • 3puppies3puppies Registered User Posts: 1,668 Senior Member
    @homerdog, Yes, generally you can you have the 529 pay the school directly. Lots of people do this.
  • homerdoghomerdog Registered User Posts: 4,183 Senior Member
    @3puppies so why are people taking withdrawals? Maybe most for off campus housing/books?
  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    edited March 8
    However, I am told that if I have released directly to university in future this will not be reported to me and I will have no tax liability.

    More falsehoods or half-truths. Having a qualified 529 distribution paid directly to the account owner or the student/beneficiary does not change any of the tax liability issues. It makes no difference to whom the 529 distribution is paid; what matters is what the distribution is used for and the timing of the 529 distribution and the expenses that are being paid.
  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    3puppies so why are people taking withdrawals? Maybe most for off campus housing/books?

    Perhaps, but 529 owners often take distributions, either payable to them or the student, that are then used to pay qualified expenses that have been directly billed by the school. One reason to do things this way is so that there is no possibility of the school getting confused as to where the money is coming from. There have been instances where a school has mistaken a 529 payment sent directly to the school as a scholarship payment, and the school then reduced need-based aid on the assumption that the student had less need because of a "scholarship" payment made on behalf of the student.
  • SybyllaSybylla Registered User Posts: 3,010 Senior Member
    Check the investment pathway in your 529, if it is age based and becomes automatically conservative in FDIC accounts, you should do the math re costs (fund costs) and benefits ( interest, any state tax carrots etc) vs current CD rates in non 529s. Some 529s are more user friendly to adjust investment options, so if you don't need it to be conservatively protected and can bear the risk, look at more aggressive options if you want to use it later rather than now. The option to change pathway might be limited to twice a year or similar.
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