<p>I started by paying the deposit for my freshman and have also paid some housing costs that were due even before school started out of regular savings. Now I am thinking I would have liked to pay for those with 529 savings. Will I still have the benefits of the tax exemption if I reimburse myself? I know that I must pay for expenses in the same year as I make the withdrawal.</p>
<p>Yes. Just keep meticulous records - what you paid for what, when, and how much you reimbursed yourself.</p>
<p>Chedva,
I have a related question if you can help. If one must pay the expenses in the year of withdrawal, how does this work if tuition is due on 1/1/2013? Obviously, I must withdraw from the 529 in December of 2012 in order to make the payment on time. I am assuming that this is kosher and a mere technicality and counts as paying in the same year.</p>
<p>momof3sons – I am curious about this too, so I hope someone answers. While I am super-paranoid about paying my freshman son’s tuition on time, I am pretty lax when it comes to my own grad school tuition (different schools). I sometimes I’ve waited until after the due date (by no more than a week or two) for various reasons, and nothing bad ever happened – no late fees, no trouble with registration. I actually think if you submit the payment on 1/1/13 it will be fine, but I suppose that is playing with fire!</p>
<p>I called my state’s 529 office to ask what kind of documentation, paper trail I should maintain re disbursed money. I was surprised when he said vaguely, “Just be sure the money is going to education.”</p>
<p>I pressed him, and said the disbursed money will be commingled in an account from which I pay for family needs as well as have money drawn for the college payment plan. He still said I don’t have to have a paper trail.</p>
<p>In my case, I’m not going to worry because the amount of my kids’ college bill will far exceed the amount in their 529s. So if challenged, I’ll be able to ask, “How did that money not go towards legitimate academic expenses?” Of course, I’ll have records of 529 disbursements (online), college bills (online), and bank statements (online) showing transfer from my account to the college payment plan, but there won’t be a precise documentation for how this 529 dollar was distinguishable from other dollars in my bank account. </p>
<p>I don’t understand why there isn’t a mechanism to disburse 529 money directly to the college bursar.</p>
<p>Some plans do permit direct payment to the college. I am able to go online and with a few clicks of the mouse direct the plan to send a check to the college. A week later, I check the college account to make sure it’s been credited. Magic.</p>
<p>Mine does too – Fidelity.</p>
<p>One year we transferred our 529 from Putnam to Fidelity and I did it by having a check made out which I deposited in the new account. That year we got a letter from the IRS and had to prove the entire amount went to another 529. So, it is always best to transfer directly from institution to institution (not the way I did it) and, yes, the IRS keeps track! (In years that you withdraw from a 529 you get a 1099, so it is reported to the IRS.)</p>
<p>I thought that if the money goes directly to the college, it is then assessed as your child’s asset rather than your own for purposes of financial aid. I know that smaller portions (approximately 5%) of parental assets are expected to be contributed. (Real property is figured differently.) I think student assets are assessed at 20%.</p>
<p>How is it a student asset if it goes directly from your account to the university’s? At that point it is gone, right, and neither your asset nor the child’s? </p>
<p>Just know that the IRS will know whenever withdrawals or patments are made. It is so much easier when it goes directly to the school.</p>
<p>It doesn’t make a difference how it is disbursed, just when. If the money goes to the school and you have scholarships or other aid that cover all eligible expenses, your 529 money withdrawal would end up being used on other expenses, and would be penalized on your tax return.</p>
<p>The IRS is looking for you to report that money, because they get a copy of the 1099 form.</p>
<p>If you take money out in 2012, you need to use it in 2012 - if the tuition bill is due 1/1/2013, it can be paid on 12/31/2012 with that money.</p>
<p>If you use other money to pay the bill and then reimburse yourself, it is also fine. On your tax return you will report how much was disbursed from the account, and how much was paid for eligible expenses. If it is sent directly to the institution, you still get the 1099, and you still have to report it on your taxes. The same applies when you transfer money - it still has to be reported on the taxes.</p>
<p>CTScoutmom,
I assume this means that if the check is dated in December it’s fine even if the school waits until the first week in January to cash the check, agreed?</p>
<p>Yes, the check acts as your extemporaneous receipt for the tuition paid. The language the IRS uses is “To be creditable, the expenses paid during a taxable year must relate to: (1) an academic period that begins in the same taxable year; or (2) an academic period that begins in the first three months of the following taxable year.” This is quoted regarding American Opportunity Credit, but it applies pretty much across the board for all the tax advantages.</p>
<p>I always pay, add up everything and then fill out the forms for reimbursement. It disgusts me that something so simple and marketed so aggressively became so complicated. We had timing issues a couple of times. Why should that make a difference? I paid tuition and got reimbursed. OK? NO? Did you ever notice how semesters work? They very often start in January, with the bill due in December. Did you notice how easy it is to pay in December and get reimbursed in January? Sheesh! And last year was a total cluster … uh… mess. You can’t get the tax credit AND withdraw tax free from the 529 plan, so after all those years of making 529 investments because the gains would be tax free I end up paying taxes on some of the gains. Thanks for nothing! oh, well at least the fund manager made some money. I am so glad both boys’ 529 plans have been emptied.</p>
<p>I should add that I am grateful that NJ Best 529 plan, at least the old fund manager, had age appropriate investments and after the financial crash of 2008/9 the 529 plans were my only investments that actually had gains in them! With both boys in college the fund manager had their money in US Treasury bonds.</p>
<p>Can a 529 be used to pay back a college loan?</p>
<p>NJres - you cannot be reimbursed in January. The distribution must be used to pay expenses from the same tax year. If you incurred and paid the expenses in December, you must be reimbursed in December.</p>
<p>You can in fact claim tax credits and use your 529 in the same year - you just can’t use the 529 money to qualify. Pay the first $4000 of eligible AOC expenses with cash or a loan (if your aid package includes $4000 in subsidized loans you’re already set), and the remainder with 529 funds (for instance, room and board which is 529 eligible, bot not and AOC eligible expense). </p>
<p>Cardinal Fang - no, you cannot use a 529 to pay back a loan, the IRS considers that to be double dipping. The only exception is if you pay back the loan in the same year that you take the loan with 529 money - because you are using 529 money to pay current year expenses.</p>
<p>I have always been careful to have the college cash the check in the same year I take the withdrawal. What I have done is take the 529 withdrawal prior to getting the bill that comes in early December from D1’s school. I don’t have enough in the 529 to cover the whole thing anyway, so I don’t have to worry about taking too much. Then I shoot the check off immediately to pay the bill, and call the school to make sure they post it as paid in December (because of winter break, want to make sure they get it done).</p>
<p>CTScoutMom may very well be right that it doesn’t matter, but I have always worried about this, so have taken care of it in this way.</p>
<p>CTscoutMom, I am confused when you talk about reporting 529 withdrawals on tax returns. I don’t think we have ever done that for regular withdrawals. I have had my kids take excess withdrawals because of their merit scholarships - then they have to pay taxes on the earnings portion of the excess, but there is no penalty because of the scholarships. But we have never reported regular 529 withdrawals used to pay tuition. I haven’t seen that required on our tax forms.</p>
<p>You mean you don’t receive a 1099 in the mail the following year when you withdraw or pay tuition with your 529 for filing tax returns? I always have.</p>
<p>You need to report on the 1040 only if you withdrew too much money from the 529.</p>
<p>You are right.<br>
[Record-keeping</a> for Your 529](<a href=“http://www.savingforcollege.com/articles/record-keeping-for-your-529]Record-keeping”>Record-keeping for Your 529)
I think, though, you still have to include the 1099-Q to prove all earnings on the 529 went to qualified expenses. Do you mean you omit sending that 1099?</p>