Well I’ve made my first mistake! S23 had a grandparent owned 529, and the grandparents let me know this winter that they wanted to roll this over into a parent owned plan. The rollover completed yesterday, and this morning I initiated a withdrawal for the college deposit I had already paid for the upcoming year.
Well, because of ED I paid that deposit in November, and even though that was 2 months ago… I’ve just read that withdrawals must be made within the same calendar year (yes I feel like an idiot for not checking this first; I assumed simply having the receipt for a qualified expense would be sufficient).
On the check memo I requested to be printed: Deposit for Fall 2023. (Vanguard didn’t require me to upload a PDF or receipt of any kind, the check memo was an optional line item.)
It seems like I have two options (please correct me if I’m wrong):
On my 2023 taxes next year I take a 10% penalty on the $300 as it’s an unqualified withdrawal as I paid in November 2022, and requested the funds in January 2023.
I forget about getting reimbursed for the deposit I made in November, and instead apply this $300 check towards upcoming 2023 expenses somehow. Thinking I could do this one of two ways:
Instead of paying the college directly via the 529 for an upcoming expense, I pay it myself and request a reimbursement amount that’s $300 less than that, and then apply this $300 check towards it (e.g. there’s a $1000 fee, I pay $1000 to the college and request a $700 withdrawal from the 529).
I make the planned laptop purchase before the school year begins and request a withdrawal for $300 less than the purchase price.
Is option two possible…? Or is that going to be a problem to have checks with different dates, and I should just forget about this and pay the $30 penalty for making an unqualified withdrawal.
You are fine. As long as you have $300 in eligible expenses this year. Doesn’t really matter what you put in the memo line on the check. Pay $300 for something yourself and that is your reimbursement for that expense. As long as it’s paid and withdrawn in the same year. Your first bullet point is what you can do. You can’t get reimbursed for last year’s payment at this point.
Yes, the ship has sailed on last year’s expenses. Use the $300 towards expenses for this year. Pull out the remaining amount you need to equal total expenses for this year at any point throughout the year. You can make several withdrawals if you want. Just don’t have the sum go beyond this year’s expenses.
Clarifying that it’s no problem to put this $300 withdrawal towards an expense of some future larger amount (e.g. a laptop, college fees of some sort) and request another withdrawal far later in the year for the balance of that expense; i.e. making a request months apart for the balance of some total sum doesn’t matter, as long as all withdrawals go towards qualified expenses…?
Bottom line: I could make random requests for different amounts of money through the end of the year, as long as the total of the withdrawals matched the total of qualified expenses in that calendar year?
Not that I would do that! But checking that individual withdrawal amounts don’t matter, as long as the total sums of withdrawals and qualified expenses match.
Yep, add them all up throughout the year. I think it would be rare that you’d take the exact amount of each expense one at a time. Child will buy books at different times, you may pay tuition at different times in a semester (if there is a change to courses), you might pay the tuition and realize it includes an expense not allowed (insurance, a student fee for a travel cost) and have to subtract that out and put in a different expense. Get your child to send you an email with all receipts for books as they are purchased.
It used to take me hours to true up the bill with what I paid and the QEE. It shouldn’t have, but it did.
Yes, with the caveat that the 529 amount withdrawn for the year doesn’t need to match the total of the QEE, it just can’t exceed that amount (without paying tax and possibly the 10% penalty).
I don’t think the ship has sailed on the deposit payment you made in 2022. The deposit is credited against the bill when it is issued, which won’t be until next summer. Only then is the college charging you 529 eligible expenses (more prosaically the 1098-T showing these expenses will be for 2023). So it would be perfectly correct for you to reimburse yourself in 2023: the 1098-T will match the 1099-Q for this year. If you tried to claim it in 2022 then you’ll have all sorts of problems filling in your 2022 tax forms because your kid is not in college yet.
For example if your kid decided not to attend that college and the deposit was then lost, it would not be an eligible educational expense, and you would have incorrectly claimed it if you had withdrawn it in 2022. Likewise, if you have to pay a refundable deposit on a college apartment for your kid, that’s not an eligible expense (only the rent itself is eligible) and you can’t take the deposit out of the 529 and later put it back in when it’s refunded.
Also consider: if this was a refundable deposit (for example if you got it back upon deciding to go elsewhere, as is the case for some early housing applications), when would you be entitled to withdraw the money from the 529? And should you treat refundable and non-refundable deposits the same or differently?
Another corollary: you (presumably) were not taking the original application fees out of your 529, even though that’s money paid to the college. Not all amounts paid to a college are eligible educational expenses. Those are only incurred when you attend and they bill you for tuition etc.
529 distributions need to be taken in the same year that the qualified expenses they are covering were actually paid. Not when the expenses were billed, not when the expenses were incurred, but when they were paid.
But a deposit is not an expense until applied to the “tuition and fees” upon enrollment next summer. For example, I can’t prepay business expenses that haven’t yet been billed and take a deduction for them.
The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.
a. Tuition and fees.
b. Books, supplies, and equipment.
If a student decides not to attend or makes multiple deposits, some of which are lost (ie never enrolls) are those all still QHEE?
@Twoin18 this was for an ED deposit. This student has committed to this school…and this money is now the schools for their use toward his costs. Paid…last year.
But that doesn’t answer the question of whether it was at the time a QHEE, which is necessary for the money to be withdrawn from the 529 last year.
An application fee is also “the school’s money” but that doesn’t make it a QHEE. A deposit that is subsequently applied to tuition is not necessarily equivalent to an “enrollment fee”. The student isn’t enrolled until next summer when they’ve done things like send transcripts, passed senior year courses and graduated from high school.
I could pay into a prepaid tuition plan at a school for use if and when (I hope) my kid attends. That doesn’t mean I incurred QHEEs at the time I made the payment.
Most importantly, the IRS says “Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. You must pay the expenses for an academic period* that starts during the tax year or the first three months of the next tax year.”
As such, an expense paid in December 2022 for the academic year starting August 2023 can’t be a QHEE @BelknapPoint