Hello I requested 529 distribution on December 31st for my daughter’s tuition fees for 2016 paid in calendar year 2016. We paid them all out of our checking account and requested a partial distribution to cover some of what we paid.
However, the distribution won’t be deposited into our checking account until January so I’m worried that it will count as a 2017 distribution. Anyone know?
Yup, it will almost certainly process as a 2017 distribution, because today (Saturday, December 31st) is not a business day, and that will potentially cause a problem with matching up qualified expenses and the 529 distribution that is supposed to cover those expenses in the same calendar year. You should always give the 529 administrator several business days to process any requested distribution.
So i just have to eat all the money I paid out of pocket in 2016? Its $10,000 and we will end up with more than we need for future years. 
Well, I think worst-case-scenario you (or your daughter, depending on who the distribution will be paid to) will have a non-qualified distribution and will need to pay income taxes and the 10% penalty on the earnings component (if any) of that distribution. You should consult with your tax preparer or financial advisor.
For next year, could you have the 529 distributions directly sent to the school each semester?
https://www.irs.gov/individuals/aotc
Can you qualify for the AOTC for some of the 2016 expenses?
Why did you wait until December 31?
We moved in November and just got tied up. Also we werent sure when she would be done and waiting allowed us to make sure we took enough… 529’s should let people know that the Dec 31st rules that apply to everthing else don’t apply to this.
The amount we wanted was after the AOTC.
What December 31st rules are you talking about? I don’t think it’s reasonable to expect that a financial transaction that you initiate on the Saturday of a three day weekend will be processed that day. Certainly if I placed an order today to sell mutual funds, the earliest that would happen would be at the close of the market on Tuesday, three days from now.
Tax rules say charitable contrubutions or retirement deductions mailed or requested by 12/31 count in that calendar year. Also, IRA’s are the same.
For charitable deductions, as long as your check is dated for December 31 or prior, you are ok. I can see how redemptions from investment accounts before the close of the market on the last business day of the year would work. But in 2016, the last day of the calendar year did not fall on a business day. Depending on the investments in the individual 529 account, a request to redeem may involve pricing securities or mutual funds, which can only be done at the next market close.
Okay will call Tuesday and cancel distribution and just eat the $10k.
How much of the distribution would be earnings? How much was contributed to the account, and how much has it grown so far?
@BelknapPoint would tax and 10% penalty only apply to the earnings portion of the distribution?
Yes. Let’s say that of the $10k distribution, $2k is earnings. That $2k will be taxed at the recipient’s top marginal rate, and the additional 10% penalty ($200 in this example) would also likely apply. So for someone in the 25% bracket, a total tax hit of $700.
This year is highly problematic for all sorts of things-- employees trying to change various reporting and designations “before the end of the year” only to discover (surprise, surprise) that because they aren’t working on Saturday, that means their colleagues in corporate HR were ALSO not working.
Folks- check the calendar. I am dreading 3,000 emails when I go back to work tomorrow from employees who claim "but I did it before the deadline (year end) even though nobody was at work on Saturday, New Year’s Eve.
OP- how are you “eating” the 10K? You don’t lose your money… and you needed to pay your D’s tuition anyway.