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529 Withdrawal Question--Timing of Tuition Payment

PurplePlumPurplePlum 131 replies9 threads Junior Member

I get that the 529 withdrawal needs to be made the same tax year as the qualified educational expenses are paid to avoid tax issues, etc.

So if spring semester tuition is due on 1/2/20 (with a late fee charged of the payment is not received by that date), when and how should one pay if one wants to use a 529?

There's no way to wait until 2020 and have the tuition sent/paid directly from the 529 as it would never get there in time. So, as I understand it, I will have to pay the tuition myself and get reimbursed from the 529, either by having a payment sent directly to me or else to the account beneficiary.

Should I pay spring 2020 tuition in December 2019 with the 529? Or does the qualified expense have to be incurred first, ex. would I have to wait until 2020 to pay the tuition?

Is there any downside to paying the spring 2020 tuition bill in 2019 with the 529?
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Replies to: 529 Withdrawal Question--Timing of Tuition Payment

  • PurplePlumPurplePlum 131 replies9 threads Junior Member
    I found this on the IRS website:

    "Academic Period
    You must pay the qualified education expenses for an academic period that starts during the tax year or the first three months of the next tax year. Academic periods can be semesters, trimesters, quarters or any other period of study such as a summer school session. Academic periods are determined by the school. For schools that use clock or credit hours and do not have academic terms, the payment period may be treated as an academic period."

    https://www.irs.gov/credits-deductions/individuals/qualified-ed-expenses

    So I guess I answered my own question? Or am I missing something?
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  • PurplePlumPurplePlum 131 replies9 threads Junior Member
    Hmmmm....I found this on Kiplinger:

    https://www.kiplinger.com/article/college/T042-C001-S003-deadlines-529-college-savings-plan-distributions.html

    "...Keep in mind that you can’t withdraw money tax-free from the 529 now for next year’s expenses unless you’re billed for them this year. This timing is different from the rules for the American Opportunity Credit. You can prepay for expenses that will occur during the first three months of the year and still take the credit. “There is no similar language for 529 plans,” says Kantrowitz. (For more information about the American Opportunity Credit, see IRS Publication 970.)"

    So the IRS language I cited in post #2 pertains to qualified educational expenses for education credits and is not specific guidance for 529 withdrawals, apparently.

    I am still unsure then. I am being billed for spring 2020 tuition now, though it is due in January 2020. So, can I withdraw the 529 money tax free now in December to pay a current tuition bill that is not due until January?

    @BelknapPoint do you have any thoughts on this?
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  • Mwfan1921Mwfan1921 2955 replies49 threads Senior Member
  • Twoin18Twoin18 1797 replies17 threads Senior Member
    Seems like there is confusion between when you are billed for spring semester tuition (in Dec) and when it is due. You can pay anytime after you are billed. So pay in Dec and withdraw from the 529 in Dec to avoid late fees. Some colleges like the one my D attends don’t bill until Jan (with a due date later in Jan) and in that case you’d have to wait until Jan to pay and withdraw.

    It’s just like paying your Jan mortgage payment in Dec to get the tax deduction in the earlier year. You can pay the Jan payment because it’s already been billed, whereas you can’t pay the Feb payment in advance and take the deduction.
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  • PurplePlumPurplePlum 131 replies9 threads Junior Member
    edited December 2019
    Twoin18, that makes complete sense to me. I just can't find any official IRS guidance on this issue (though perhaps my research skills are lacking).

    Since the tuition bill is due on January 2nd, there is no way I could pay it with directly with the 529 in time if I wait to pay it in January. Even if I pay it myself and get reimbursed from the 529, I would have to wait until January 1st to pay it, and in order for the school to receive the payment by its due date of 1/2/20, I would have to electronically pay it from my bank account on January 1st or January 2nd and hope it credits to the account immediately and then I could withdraw the 529 funds in January to reimburse myself, which I would rather not do (though by doing it this way, I would be satisfying the "expenses incurred and expenses paid" matching requirements).

    I prefer to pay the school directly from the 529, which I can only do if I withdraw the 529 money now in December and actually pay the January bill in December.
    edited December 2019
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  • techmom99techmom99 3494 replies6 threads Senior Member
    @PurplePlum -

    When I had an issue with timing and paying my son's tuition, I called the office at the school and explained my situation. They made a note in the file that the tuition was coming and they didn't even charge the late fee. It's a state school so perhaps they are more understanding about people's financial issues. Maybe you could call your school and explain that you can't make the payment until 1/1 and they can notate the file that the payment is in progress?
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  • BelknapPointBelknapPoint 4693 replies17 threads Senior Member
    BelknapPoint do you have any thoughts on this?

    Yes.

    -I'm glad that you figured out the IRS language you quoted was for the education tax credits and not 529s. The IRS makes this unnecessarily complicated, so it takes some learning and getting used to.

    -techmom99 makes a very good point about contacting the school, explaining your desire to make the spring payment in January using 529 funds withdrawn in January, and asking for some leeway with the due date. I have done this, and my experience was that the school billing people were understanding and always accommodated me. This may be your first rodeo, but it definitely is not theirs.

    -Making the payment in January for the spring semester can be financially advantageous for you, especially in the senior year. This is because a traditional four academic years extends over five tax years, and to claim five years of educational tax credits (AOTC and LLC), you need to have qualified payments made in all five tax years.

    There are lots of moving parts here, but having a reasonable strategy based on good information can both save money and keep you out of trouble with the IRS.
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  • PurplePlumPurplePlum 131 replies9 threads Junior Member
    Thank you for the replies!

    I will contact the Bursar's office on Monday to ask about an extension on the tuition due date because as properly pointed out by BelknapPoint, this must come up all of the time for this university, since it has a 1/2/20 tuition due date.

    We do not qualify for AOTC or LLC credits due to income limits. So, truthfully, I am seeking to make sure I do not run afoul of IRS rules concerning the timing of 529 withdrawals.

    It surprises me that this has not been addressed by the IRS in a formal manner (as far as I can tell), since the 529 withdrawal timing issue must arise frequently.

    If the university will not give me a tuition payment extension, then I think I will just withdraw the 529 money in December and make sure it is credited to the student's account in December. I have no idea if this is reasonable to do as far as the IRS is concerned, but it seems reasonable to me. I am really not sure how else to pay the tuition bill by 1/2/20 any other way, using 529 funds, unless I wait until 1/1/20 and pay it myself electronically, and then wait for reimbursement from the 529.

    I guess what I am struggling with is does the qualified expense have to be incurred in the same tax year as the 529 withdrawal, or is it enough that the tuition bill is received and paid by 529 funds in the same tax year, especially if the qualified expense was paid in December for a qualified expense that is "incurred" within the first three months of the following tax year.

    That's the million dollar question.
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  • BelknapPointBelknapPoint 4693 replies17 threads Senior Member
    edited December 2019
    I guess what I am struggling with is does the qualified expense have to be incurred in the same tax year as the 529 withdrawal, or is it enough that the tuition bill is received and paid by 529 funds in the same tax year, especially if the qualified expense was paid in December for a qualified expense that is "incurred" within the first three months of the following tax year.

    That's the million dollar question.

    The 529 distribution and the payment of the qualified expenses that the distribution is meant to cover must happen in the same year. It doesn't matter when the expenses are billed by the school or when the services or goods being paid for (classes, housing, meals, textbooks, etc.) are received. The timing of the payment of the qualifed expenses and the withdrawal from the 529 is what matters to the IRS. And yes, it is surprising (and unfortunate) that this has not been "formally" addressed by the IRS.
    edited December 2019
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  • Twoin18Twoin18 1797 replies17 threads Senior Member
    For cash accounting (used for personal and most small business tax returns), an expense is incurred when it is billed *and* paid. It doesn’t require that the goods or services have been provided. A deposit made to order something would still be an incurred expense.

    But you can’t incur expenses that haven’t been billed, which is why at the end of the year businesses may ask you to invoice this year (or next) so they can do their end of year tax planning.
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  • PurplePlumPurplePlum 131 replies9 threads Junior Member
    Ok that makes sense. So, I think it should be fine to withdraw 529 funds in December and pay the tuition in December, since tuition has been billed already.

    I'll see what the university says when I call on Monday. If I can extend the due date, I will. If not, I'll probably just withdraw and pay in December.
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  • TS0104TS0104 1033 replies28 threads Senior Member
    Doesn't the three month language that you found settle the issue? You are paying in Dec for a (semester, in my case) that starts in the following 3 months of the next tax year?
    After reading about this a few months ago on this board, I asked my financial advisor and she had never heard of any issues with paying spring semester tuition in December, when it is billed. (That's what I've done for the past two years anyway!)
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  • PurplePlumPurplePlum 131 replies9 threads Junior Member
    @TS0104: No, the 3 month language that I quoted in post #1 applies to qualified educational expenses for education credits, not specifically to 529 withdrawals. I did not realize that until after I posted it.

    I could find no specific authoritative IRS guidance on the issue, though of course I may have missed it. In any event, glad to hear that you have not had any issues paying spring semester tuition in December. I may end up doing the same!
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  • BelknapPointBelknapPoint 4693 replies17 threads Senior Member
    After reading about this a few months ago on this board, I asked my financial advisor and she had never heard of any issues with paying spring semester tuition in December, when it is billed. (That's what I've done for the past two years anyway!)

    There is no issue with using 529 funds to pay spring semester tuition in December, when it is billed, as long as the 529 funds that are used to cover or reimburse the payment are withdrawn from the 529 account in the same year that payment is made.
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  • TS0104TS0104 1033 replies28 threads Senior Member
    Ahhh ^^^^ so what would need to be avoided would be withdrawing the funds in December, but not making the payment until January, for example?

    If that's the case, it makes a lot of sense, preventing withdrawals that are then held on to or reinvested for a year or longer.
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  • BelknapPointBelknapPoint 4693 replies17 threads Senior Member
    Ahhh ^^^^ so what would need to be avoided would be withdrawing the funds in December, but not making the payment until January, for example?

    Correct.
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