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Question on 529 plan and how to use them

rtr90jkrtr90jk Registered User Posts: 15 Junior Member
I am familiar with flexible spending account for medical expenses where the true up (receipts) is between you and the managing company.

How does 529 true up work? Is it between you and IRS?

If I have 11500 for example in 529, can I ask for distribution now anticipating tuition cost in aug ... the receipts (true up) is verified only by IRS?

I dont want to withdraw x, y, z during the year. I would like to do just one withdrawal for x+y+z.

Any suggestions?
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Replies to: Question on 529 plan and how to use them

  • socaldad2002socaldad2002 Registered User Posts: 1,043 Senior Member
    Per 529 article:

    "Make sure withdrawals are in the same calendar year that the qualified expenses were paid. It doesn’t matter if funds are withdrawn in January for expenses that are not paid until August. Or if the withdrawal occurs in December for expenses previously paid during that year. Just make sure they match up within the same calendar year." (savingforcollege.com)
  • NCKrisNCKris Registered User Posts: 140 Junior Member
    Yes, it is between you and the IRS.
    When you pay the college for tuition or 'qualified expenses' to the college (directly from 529 or from your account), you get a 1098 (?) form that will be used to match the college expenses and distributions.
    We have to careful to match the distribution to the expenses incurred in the same calendar year (as noted above).
  • rtr90jkrtr90jk Registered User Posts: 15 Junior Member
    That is helpful. So school gives 1098, plan administrator gives you distributions in form of cheque and its during filing IRS 1040 that you have to match amounts in 1098 to distributions.
  • BelknapPointBelknapPoint Registered User Posts: 4,261 Senior Member
    So school gives 1098, plan administrator gives you distributions in form of cheque and its during filing IRS 1040 that you have to match amounts in 1098 to distributions.

    If the 529 plan administrator provides the option of using an ACH (electronic) transaction for distributions, and I think most do, I highly recommend using this as an efficient and simpler way to move funds as opposed to a paper check.

    There is no place on any IRS tax form to "match" amounts paid for qualified expenses with 529 distributions. You need to maintain your own notes/spreadsheet/whatever.

    The college will provide the student (unless an exception applies) a 1098-T that shows Qualified Education Expenses (QEE) paid during the tax year. Note that in this context, QEE refers to expenses that qualify for education tax credits, which explicitly does not include room and board.

    The 529 plan administrator will provide a 1099-Q to whoever a 529 distribution was paid (typically the account owner and/or the account beneficiary) during the tax year. There is no breakout on a 1099-Q between qualified and nonqualified distributions. Note that for 529 distributions, QEE has a different meaning than described above. Room and board can be a QEE for purposes of 529 distributions.

    Confused yet? IRS Pub 970 can help sort things out.

    https://www.irs.gov/pub/irs-pdf/p970.pdf
  • rtr90jkrtr90jk Registered User Posts: 15 Junior Member
    that was clear at this point. I may have more questions as I get into it. My 529 sent me notice of funds maturing and asking me to make a choice of distributions by end of July. I wont know what college tuition for fall semester would be.
    My DS also got partial flute scholarship so I dont know how that plays into it.
  • twoinanddonetwoinanddone Registered User Posts: 21,504 Senior Member
    The 1098-T forms are not all that reliable, especially if you have scholarship funds and 529 funds, buy books, have fees that may not be QEE but can be 529 eligible. My kids' schools did not send out 1098-Ts but they were available online.

    Can I say how happy I will be next April when our taxes will have no college adjustments to be made? No credits, but a lot easier to do taxes.
  • cptofthehousecptofthehouse Registered User Posts: 27,507 Senior Member
    You do not report qualified 529 withdrawals on the 1040. Its up to you to make notes to show that the distribution is qualified for that year in case the IRS inquires about it. The 1098T and the 1099Q often do not match because not all expenses that can be paid with 529 funds show up.

    If you did not use the 529 distribution for qualified expenses, you may have to report it on 1040 schedules and pay a 10% penalty tax, depending on circumstances.
  • BelknapPointBelknapPoint Registered User Posts: 4,261 Senior Member
    My 529 sent me notice of funds maturing and asking me to make a choice of distributions by end of July.

    What is the account invested in that is maturing and requires you to make a choice of distributions by the end of July? That sounds very user unfriendly.
  • CTScoutmomCTScoutmom Registered User Posts: 1,901 Senior Member
    They are not asking how you want the funds distributed to you, they are asking what you want to do with the funds within that one investment - how you want it invested within their offerings. There may be several options with the 529 "fund," some of which are intended for long-term investment, while others are more liquid. See if they have a number you can call to ask what those options are. You shouldn't need to withdraw everything by July, and if your daughter gets need-based aid, you're better off waiting further into her education to use the 529 funds, because distribution will impact the aid calculations the following year.
  • BelknapPointBelknapPoint Registered User Posts: 4,261 Senior Member
    edited May 6
    ...if your daughter gets need-based aid, you're better off waiting further into her education to use the 529 funds, because distribution will impact the aid calculations the following year.

    Distributions from a student-owned or parent-owned 529 account will only impact future need-based aid calculations in a good way. These distributions are never counted as income, and as the asset is reduced over time, calculated need will normally increase. But, YMMV, as every school that offers need-based institutional aid can run the calculation however they see fit.

    Edited to add: so, using 529 funds early may be a good strategy, depending on other factors.
  • rtr90jkrtr90jk Registered User Posts: 15 Junior Member
    I didnt read it carefully initially

    "
    Your collegesure CD 529 will mature on 7/31
    in order to initiate a withdrawal or select reinvestion options fill out this form

    Distribution method:
    check payable to Acc owner
    check payable to Beneficiary
    check payable to educational institute

    EFT payable to Acc owner
    EFT payable to Beneficiary
    "

    So the question is what is the best option for withdrawal to pay for college tuition and room board. Check payable to educational institute is preferably but the timing would be an issue and dont know who to make payable out to (registrar? for both tuition and room).
  • cptofthehousecptofthehouse Registered User Posts: 27,507 Senior Member
    You do not want to get the funds distributed to you in, say, December, and when you pay the college, they note the payment to be in January of the next year because that is when they got their payment or processed it. That's something that can happen. We lost a 1098-T that way buy paying college costs too early which also lost the possibility of an educational credit for one more year.
  • privateIDprivateID Registered User Posts: 281 Junior Member
    Of course if you didn't use 529 funds, in say the freshman year, you most likely would have used another asset you owned, meaning it really does not matter for financial aid purposes (some parent asset would have been depleted). Having said that, I am a fan of using 529 funds ASAP to make sure they get used.
  • RichInPittRichInPitt Registered User Posts: 366 Member
    I always just have them EFT to my checking account and I EFT to the school.

    Depending on how much you have funded, and your expected returns, you can wait until the end of the year to withdraw what you paid for the entire year, or estimate and withdraw everything at the beginning of the year (which would be bad if the child drops out).

    Nothing needs to be documented for your returns. I keep a spreadsheet of cashflows and 8mages of receipts in case of an audit.
  • rtr90jkrtr90jk Registered User Posts: 15 Junior Member
    Richin - so there is no compulsory matching of distributions(1099-Q) to QEE (1098-T) to IRS.
    It is only if IRS audits. right?
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