I inadvertently withdrew more than the college’s allowance for room and board. I don’t have any other qualified expenses to apply this overage too so would love to return the overage to the 529 account with no tax implications. I called the relevant 529 plan organization and they advised I could simply put the overage back into the beneficiary’s 529 account. (I am in the 60 day window). I looked at IRS Pub. 970 to find support for this and only see “recontributions of refunded amounts” where the student receives a refund from the college of qualified educational expenses. That is not my situation. Am I missing something here?
Half kidding here: forward the excess distribution amount to the school, and then immediately ask the school for a refund because of your (intentional) overpayment. Your 60 day clock for a recontribution will start once you receive the refund.
It is my understanding, that some plans don’t have a format “redeposit” process - some do (e.g., Fidelity).
The IRA doesn’t mandate a special process - so using a standard contribution would fulfill the rules.
However… the IRS only allows “redeposit” for refunds (e.g., when a class was dropped, etc.). In fact, any redeposit form might actually make you declare and sign that this IS indeed due to a REFUND - to comply with IRS rules.
If you withdrew more than the actual expenses you had incurred (e.g., for some reason you withdrew without having incurred expenses) - then the penalty applies. Making an equal-amount contribution won’t undo that.
PS - do you have the option to already pay the Spring Semester? Colleges can bill you in December for the next calendar year, and these amounts will be appropriately declared.
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Run the numbers before you do anything. People often tie themselves up in knots over $25… surely you will expend more than that just doing the paperwork on any of your perfectly valid options. Make sure it’s worth it before you start down that road…
What exactly would your tax penalty be on your overage?
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Maybe buy your kid a laptop before the end of the year?
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There’s a lot of gray area with a recontribution and, as noted here by DigitalDad, different 529 plans will have different procedures.
My personal and anecdotal experience happened when a scholarship posted to a student’s account late, after the original balance due had already been paid in part with 529 funds. The school refunded the overpayment (no form of any kind to complete and sign), and within 60 days the refund amount was deposited in the student’s 529 account. The 529 plan didn’t care that it was a recontribution, and on the next account statement it was designated as a regular contribution. One of my thoughts was that the earnings portion of the refunded amount was effectively “washed” when the plan administrator designated the full amount as a new contribution (even though they were clearly on notice that the deposit was really a recontribution of part of an earlier distribution).
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I believe the concern here is whether a tax liability arises (plus a 10% penalty) for having withdrawn money for other than qualified educational expenses. If it was a refund, and it was re-deposited within the 60 day window, then there would be no tax liability once you file your return.
If I recall the IRS regs correctly, the 529 plan is not required to track/differentiate this on their end.
When I had done this because spring housing was refunded due to start of pandemic, I sent the re-deposit cheque with a cover letter citing the specific refund and circumstances, requesting it not to be treated as a new contribution - and then kept a copy as backup with that year’s tax return!
In the scenario I described, the 529 administrator involved did (and still does) distinguish between the dollars contributed and the dollars earned. It’s shown on quarterly account statements, available online, and statements for each distribution show how much of the distribution is from contributions and how much is from earnings. Treating as 100% a new contribution dollars that are actually a recontribution that were originally distributed as part contribution and part earnings screws up the accounting, and without explicit guidance regarding recontributions I find it difficult to believe that the IRS expects the average taxpayer to track all of this.
How hard it is to track- we’re not talking about monthly recontributions, at most it’s twice in the four years of a kids college education? And if it’s 5 dollars, it’s likely not worth it (and I agree, small amounts become hard to track). But $1500, a one-time event?
Not that hard.
@blossom :
Guidance on Recontributions, Rollovers and Qualified Higher Education Expenses under Section 529
Notice 2018-58
III. RECONTRIBUTION OF REFUNDED QHEEs
The Treasury Department and the IRS are aware of concerns expressed by QTP administrators regarding the administrative burdens that would arise if a recontribution of a refunded QHEE is treated in the same manner as a rollover under Notice 2001-81 requiring a breakdown of the earnings portion of the recontribution.
Because the amount is refunded by the eligible educational institution, which will have no information regarding the income portion of each tuition payment (whether made from a single or multiple QTPs), QTP administrators generally would be unable to determine the earnings portion of the recontribution. Accordingly, the Treasury Department and the IRS intend to issue regulations providing that the entire recontributed amount will be treated as principal. This rule of administrative convenience will eliminate the burdens associated with determining the earnings portion.
Furthermore, because the recontributed amount previously was taken into account in applying the overall contribution limit under § 529(b)(6), the Treasury Department and the IRS anticipate that the regulations will provide that the recontributed amount does not count against the limit on contributions on behalf of the designated beneficiary under § 529(b)(6). In addition, consistent with § 529(c)(3)(D), the Treasury Department and the IRS anticipate that the regulations will confirm that the recontribution must be to a QTP for the benefit of the designated beneficiary who received the refund of QHEEs, although the recontribution need not be to the QTP from which the distributions for the QHEEs were made.
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Well, that certainly is the easiest way for both 529 administrators and account owners to deal with recontributions- no tracking of earnings required. Although I don’t suggest that account owners should intentionally make large overpayments to schools so that in the process of a recontribution earnings can be converted to contributions with no tax consequence, it’s interesting to see that the IRS is essentially turning a blind eye. Under most circumstances there probably isn’t much of a benefit, but I can easily come up with reasonable hypotheticals when the benefit could be substantial.
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I had already paid the spring semester tuition before I realized my mistake. My guess at the taxes I’d have to pay on the nonqualified withdrawal is over $100.
We’re going to take the easy route: laptop under the Christmas tree!
Thanks all for your input!
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Buy a computer for your student.
Did you take into account the books your student bought for all their classes this year?
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