We have a small 529 account that we’ve used for a computer but nothing else during my D’s undergraduate years because she has been on a full tuition plus room and board equivalent scholarship (plus a few small additional outside scholarships). It looks like she is going on to pursue a PhD program, and since it is in engineering it is also fully funded for tuition and some kind of fellowship to cover room and board and living expenses. Since the fellowship to cover living expenses is fully taxable, can we use the 529 to cover a few months of rent without having to pay any taxes on the gains? If so, is there any reason we should do it now in her last semester of undergrad or if we should do it during her first semester of grad school? I am not expecting any future grandchildren, and I’d really like to get the account closed out for simplicity.
Yes.
As long as the 529 distributions are made in the same tax year in which the qualified expenses those distributions were meant to cover were paid, you should be ok. If you take a 529 distribution in January of your daughter’s last undergrad semester anticipating that the 529 funds will be used for grad school living expenses in eight months and the grad school plans don’t develop as anticipated, then you’re looking at a non-qualified distribution.
Thank you for your help @BelknapPoint. It is good to have confirmation and know that there isn’t really a difference between graduate and undergraduate use of it in her case. I’ll have to think about when the funds might be most useful to her I guess.