I have always just cut a check myself and then had the 529 reimburse me. Has went just fine.
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I do a transfer out of our checking account to the school.
We reimburse ourselves out of the 529, before the end of the calendar year, for qualified expenses in that calendar year.
I keep a detailed spreadsheet with expense categories broken out according to âQualified Higher Education Expensesâ in chapter 7 of Publication 970.
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I pay myself - and when I want - granted I donât need the money. I try to wait for a market high.
But even if I was paying the school and needed the money to do so, Iâd likely get the money a few days earlier to me - so I know it came through.
Itâs perhaps just a control/visibility thing for me - but I prefer to have the money hit my account. I didnât try any other way.
Plus, in housing (off campus, for example), I canât pay a landlord that way.
So I KISS - with me at the center - I pay the âvendorsâ and I get paid by Fidelity/Vanguard, etc.
But Iâm the centerpiece of all stagesâŠfor simplicity.
Edit - just reading @tamagotchi - this is what I do too. And @MarylandJOE too. Itâs just for some who need the money to pay, you have to reimburse a few days b4 so you have it.
Is there anything particular that needs to be done to keep records straight? i.e. open a new checking account only used for college expenses, etc. Not sure how often people get audited for a 529. TIA
No need to have a separate account. Just keep good records of an accounting of what was paid and then reimbursed. Follow the guidelines and there wonât be any issue. I havenât heard of any audits but Iâve also just followed the rules.
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We dont need the money but are in a weird position of possibly needing all of it for grad school and also possibly not needing any for grad school.
I just set up a separate brokerage account (joint witb D24). I had always planned to cash flow room and board, but now she only has like 4k of tuition, so my plan is to each year withdraw full school COA less her scholarship. Then I can keep that money segregated and growing in the taxable account in case she needs it. So I am maximizong withdrawals so we dont get a penalty, but also saving it for future education.
The separate account isnt a must, its just easier for me to keep it segregated. I know its all fungible, but I want to make sure D has the full benefit of the savings for her. I use my bonus to fund the 529s every year, and I put her contribution directly into that account this year. I am also using it as a tool to teach her avout saving and investing. She can see it when she logs in.
We never had a problem with timing, delays, etc. and never got audited.
But pro tip- kid had an outside scholarship which was paid directly to the college but NOT in time for first semester billing. I was fretting about cash flow, whether to overpay from the 529 and have the balance applied to the next semester, get hit with a late fee, whatever. Picked up the phone and called the bursar-- yes, sat through five minutes of voice mail prompts. But ended up with a very nice and knowledgeable payments person in the bursarâs office who listened to my fretting and said 'Wouldnât it be easier if I just moved the due date for your payment out so there isnât a problem?" I said âYou can do that?â and she said âI just didâ.
So fyi- even a big university has workarounds if your 529 payment ends up being delayed. Ours never were- but I guess it can happen. Make a phone call!!!
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When S24 was born, we did 200 per month into a 529, and the max per year into a Coverdell. When he was in middle school we decided to stop contributing because we only wanted to contribute enough for 5 years of state school. As we thought, S24 will need 5 years to get his Engineering BS. A relative paid his first year because the stock market took such a huge hit, and as such did not want us to withdraw with the market down. With that generosity, S24 will have quite a bit left over upon graduation, those funds are his for graduate school if he decides to go, or they can stay growing TAX FREE for his kids. Now we were not as wise with the other 2 kids due to a change in family situation, their accounts are not as large, but S28 has not made his school choice yet, and D30 has already decided on state school or bust. It has made the whole paying for school and planning on 5 years of tuition from the get go, so much less stressful for our family, and we only really gave up a little dining out and movie tickets. And kept the cars a little longer.
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nope.
I keep a spreadsheet, so I know - in case I was audited - which is doubtful of course.
But I can speak to every nickel of reimbursement.
But itâs like an HSA.
I pay the doctor. Then I go home and access the $$ from the HSA to reimburse myself.
Very simple.
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You should consider whether avoiding the penalty is actually causing you to pay more taxes on withdrawals. A kid in undergrad is often subject to kiddie tax, at parents high tax rates. And withdrawals directed to you will certainly be at your tax rate not hers. Waiting for her to be out of the kiddie tax so you can direct the withdrawal to her and pay her lower rates often results in savings of more than the 10% penalty.
Iâd keep the money in the 529 then if is needed for grad school it can be used for that with no tax, and if it isnât then it can be withdrawn against that scholarship in the year your kid turns 24 and taxed at her low rates.
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I agree they should do some careful modeling. And although no one wants to pay the non QEE withdrawal penalty, it is 10% of only the gains, not the principal. And since that money has been growing tax free, taking that penalty is sometimes not a terrible choice.
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I never said i was withdrawing the scholarship amount. Only that if after the scholarship, if we had $15K in expenses we would take out the $15K even if we didnt need it. We were only going to make tax free withdrawals.
From Investopedia: The scholarship exception, however, lets you withdraw up to the amount of that scholarship and use the money for any purpose penalty-free. The earnings on that portion of the distribution will still be subject to income tax. However, if you use the withdrawal for qualified education expenses, the money will be both tax- and penalty-free.
Just FYI. Itâs never straight forward when dealing with the US Tax Code
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I am aware of all that.
I appreciate the advice, but I am a finance attorney, and my husband is a tax lawyer with a masters in tax accounting. I assure you we are covered.
Literally the plan is to withdraw official school COA less scholarship. We are fine.
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Hereâs an interesting question which I havenât been able to find a clear answer to:
States are starting to come out with rules on the tax treatment of 529 to Roth IRA rollovers.
A good summary is here:
But if the parent (account owner) and kid (beneficiary) live in different states, which state tax rules apply? If the owner makes a regular non-qualified withdrawal and has a check sent to the kid, they pay the tax, if it is sent to the owner then they pay the tax.
So what about the rollover (as unfortunately we live in CA which means we really donât want to be liable)? If it isnât the account owner who is liable, then how are states which want to recover any tax deductions for prior contributions going to figure this out?
And I know you canât change the beneficiary without restarting the 5 year clock. But what if you change the owner of the account to the kid, and they remain the beneficiary?
Any thoughts @BelknapPoint ?
Lots of good questions to which there are not yet any clear answers (at least that I have seen). I would think that with a 529 to Roth IRA rollover, tax liability, if any, would fall on the beneficiary. The 529 account owner would be on the honor program if recovering prior tax deductions is applicable. And if the 529 account owner is changed (even if the beneficiary becomes the new owner) with no change in the beneficiary, the five year clock is not reset. Again, these are all just my best guesses.
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Thank you for posting this. We, too, live in California. In thinking about what I read for CA ScholarShare, I suspect that the plan administrator would be reporting to California that a transfer (rollover, conversion, whatever it ends up being called) occurred. If the beneficiary is out of state, and this is their only CA income, perhaps only the 2.5% penalty on the earnings portion would apply? I will be watching this as time passes as we have an amount in one offspringâs 529.
You donât pay CA taxes or the 2.5% penalty if a non-qualified distribution is made to a recipient who isnât resident in CA (or at least we havenât this year: as I have always understood it, the recipient reports it as income in the state where they are resident at the time of receipt, it isnât California earned income - in our case the Vanguard 529 is in Nevada anyway, and non-CA residents could use CAâs 529 and it wouldnât make them liable for CA taxes). The ownership issue seems irrelevant from a tax nexus point of view since this can be changed independent of the beneficiaryâs receipt of funds from the plan.
And as I understand it, CA seemingly intends to treat the Roth conversion as a non-qualified distribution. So it does seem logical that it would be taxed the same way and if the recipientâs state excludes it then no tax is due, as @BelknapPoint suggested.
It has been a while, but I believe we had the 529 Plan pay directly. We sent them a letter of authorization and they complied.
I donât think there is likely to be an issue if the 529 Plan pays you, you pay the expenses, and you document it and retain the documentation in case of an audit. I just figured it was easier to avoid any potential audit.
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I donât think that actually avoids an audit.
The withdrawal documentation doesnât say to whom the payment was made or whether the amount exceeded the amount permitted without penalty. They only inquire about it if you are already being audited. It just might make the audit response require slightly less supporting documentation.
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