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Strategies for Using 529 Funds

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Replies to: Strategies for Using 529 Funds

  • homerdoghomerdog Registered User Posts: 4,183 Senior Member
    Thx @BelknapPoint full pay over here so that won’t happen to us. S19 is our oldest and, depending on where he ends up, we will most likely have 2/3 of his four year tuition in his 529. Just have to figure out if we drain it starting at the beginning or just use a smaller percent and use some income to make up the difference. I’m leaning towards draining it and just using other savings for the last few payments.
  • KnowsstuffKnowsstuff Registered User Posts: 2,421 Senior Member
    @BelknapPoint. This last point is an excellent one about schools getting confused where the money is coming from
    We just started using our 529 money so that's something to look into. Thx!
  • homerdoghomerdog Registered User Posts: 4,183 Senior Member
    So is there no disadvantage to withdrawing the money to our account and then paying the school as long as it all happens in the same calendar year?
  • me29034me29034 Registered User Posts: 1,664 Senior Member
    We were unable to pay the school directly, so we pay the bill from our checking account, then withdraw an identical amount from the 529. We have been told that as long as we can document that the amounts withdrawn are for education related expenses there is no tax liability. We were told we could have also withdrawn an amount to pay for books as long as it was documented but we have not done that. D is now a junior and so far this has worked fine.
  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    So is there no disadvantage to withdrawing the money to our account and then paying the school as long as it all happens in the same calendar year?

    It may be less efficient (two transactions instead of one), but for a distribution used to pay or reimburse qualified expenses, it makes no difference from a tax liability perspective.

    Note that if all or part of a 529 distribution is non-qualified, it can make a tax difference based on how the distribution is paid. The earnings portion of a non-qualified distribution paid to the student/beneficiary or directly to the school will be taxable income for the student; the earnings portion of a non-qualified distribution paid to the account owner will be taxable income for the account owner.
  • 3puppies3puppies Registered User Posts: 1,668 Senior Member
    I agree with @BelknapPoint - some people like to have control, and to be able to avoid any confusion. Some parents have one 529 savings plan that they will use for multiple students. Since some 529 plans require paper distribution request forms sent via regular snail mail, I can understand wanting to know everything is done right.

    If you want to direct the 529 Plan to make the payment directly to the school, it wouldn't hurt to contact the school first, to find out exactly how they want the payment handled. Out of the millions of kids who attend college, and hundreds of thousands who pay at least a part of it with a 529 plans, at schools all over the country, you can imagine that with even very small error rate, mistakes still happen to lots of kids. One example - a friend told me she had requested a payment to the school directly, and instead of $10,000 which was needed, they only sent $1,000 (which it turned out was what she had actually asked for - it was her own mistake) - but it created a bigger hassle because her son was not able to register for the following semester without getting the balance paid. Anyone who has worked in a bursar's office can understand that problems happen all the time, most of which can be fixed, but they too often seem to rise to the panic level too early. Because, after all, there is a lot of money involved.
  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    We were unable to pay the school directly, so we pay the bill from our checking account, then withdraw an identical amount from the 529. We have been told that as long as we can document that the amounts withdrawn are for education related expenses there is no tax liability. We were told we could have also withdrawn an amount to pay for books as long as it was documented but we have not done that. D is now a junior and so far this has worked fine.

    Agree 100%. Keep good records. Submitting documentation is not required, but if the IRS comes calling with questions, you want to be able to substantiate the qualified expenses and the corresponding 529 distribution(s).
  • eh1234eh1234 Registered User Posts: 1,066 Senior Member
    @BelknapPoint I have a question about non-qualified expenses similar to what you touched on in one of your posts. . My senior is entering a music performance bachelor's program and we will use 529 funds to buy him a better instrument once he's enrolled in a school Should we have the amount needed to buy the instrument transferred directly to our son rather than to our own account to minimize taxes/penalties?

    Even though it's technically a "tool" related to his coursework, the cost of the instrument is going to be about the same as a year of tuition at the least expensive school he is considering, so obviously the amount we withdraw will exceed the published COA. I assume it's a non-qualified expense.
  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    Should we have the amount needed to buy the instrument transferred directly to our son rather than to our own account to minimize taxes/penalties?

    You should crunch the numbers both ways to see which scenario incurs less in tax/penalty. I think it will usually be the beneficiary/student/child who should take the distribution in a case like this, but without knowing the specific tax situation of both parties, a definitive answer can't be given.

    Even though it's technically a "tool" related to his coursework, the cost of the instrument is going to be about the same as a year of tuition at the least expensive school he is considering, so obviously the amount we withdraw will exceed the published COA. I assume it's a non-qualified expense.

    This can be a gray area. Given the type of program involved, it sounds like the instrument is required for enrollment or attendance. Documentation from the school explicitly stating this would be helpful. In the end, it's your call, and if you treat the instrument as a qualified expense you need to be prepared to defend your position with the IRS. Posing the question to the FA people at the school might garner some useful information.
  • eh1234eh1234 Registered User Posts: 1,066 Senior Member
    Thanks @BelknapPoint - That's a good idea to reach out to the school FA office. I inquired with VA529 and they sent me a link to an IRS publication - not very helpful!

    He has an instrument that we purchased at the end of middle school but he can't really continue using it at the college level.
  • 3puppies3puppies Registered User Posts: 1,668 Senior Member
    @WantWhatsBest - I think your post is helpful. I just wanted to clarify one thing -when you said

    " Spring bill was due January 7. I withdrew funds January 2, NOT in December. It has to be in the same calendar year."

    You are correct that it has to be in the same calendar year. But I wanted to point out that many schools will accept the payment of the Winter/Spring term in December, it sometimes make sense to withdraw the 529 funds in December, and pay the school in December. This may vary by school.

    Tthe student graduates in May following senior year, flies the nest, and gets a job immediately, becoming a self-sufficient member of society (like we all hope :) will happen). The student is no longer a dependent if their parents are not providing more than 50% of support.

    Since there are only 4 years of AOTC, parents usually want to take advantage of them fully, and paying only 1 semester (their freshman fall) tuition/fees in their very first semester doesn't always qualify them for a max AOTC. Paying both terms in the same calendar year may help.

    There are lots of different situations and schools have different rules, but for some people, this is something to think about.

  • BelknapPointBelknapPoint Registered User Posts: 4,123 Senior Member
    ^^^
    On the flip side, if there are payments for qualified expenses in the five tax years that cover four academic years, it's possible to take advantage of education tax credits for all of those five tax years through a combination of the AOTC and the Lifetime Learning Credit. As always, proper prior planning and execution can lead to the best outcome.
  • WantWhatsBestWantWhatsBest Registered User Posts: 109 Junior Member
    Great points of clarification!
  • twoinanddonetwoinanddone Registered User Posts: 20,548 Senior Member
    For one child, I used the AOTC for the first 4 year. For the other one, I didn't use it the 4th year because that was her study abroad and the they did not count very much as tuition but all as small 'fees' and did not issue a 1098-T. It was just easier to save that year's AOTC and use it for the 5th year.
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