I’m getting ready to request 529 distributions for the first time and have a few questions. My D has a $3000/semester tuition scholarship. I am planning to cover all qualified expenses with her account, and may use it to pay minimal non-qualifying expenses.
Her housing cost will be about $600 more/year than the average room & board expenses reported on the school's COA. If I pay the higher amount with the 529, is the $600 difference a non-qualified expense, or is it still OK as long as the amount equals the amount on the student bill? I guess the same question would apply to book expenses billed to her account that exceed the "average" expenses calculated by the school.
Tuition & Fees charge is about $14,000 per semester of which she will need to pay $11,000 per semester. If I withdraw, say, $12,000 and use the extra for non-qualified travel expenses, I understand that she (or I) would need to pay taxes on the portion not used for tuition, but may not need to pay the 10% penalty because of the scholarship. Is that correct?
She has more than enough in the 529 for all qualified expenses and I’m a bit cash poor at the moment due to some unexpected expenses. I’m just trying to figure out if its a dumb idea to take money out for expensive flights. It seems like it would be a minimal amount of income to pay taxes on, but I may be missing something because I just saw a thread questioning what would happen if 529 funds were used for one or two months of rent that didn’t occur during the school year.
529 funds can be used for room and board up to the greater of A) the allowance for room and board, as determined by the school, that was included in the COA; or B) the actual amount charged, if the student is residing in housing owned or operated by the school. If your daughter is in school owned or operated housing, the $600 difference that you are being billed above the COA reported amount is a 529 qualified expense.
I believe that your interpretation of what happens with the extra $1,000 is correct (taxable but no 10% penalty because of the scholarship). If the distribution is made payable to you, the non-qualified portion will be taxable to you. If the distribution is made payable to your daughter or the school, the non-qualified portion will be taxable to her. Also, only the earnings portion of any non-qualified distribution is subject to tax (and possibly the 10% penalty).
^yes, Madison is right, if you would qualify for AOTC income wise, then it might be better to use some of the qualified tuition/fees/books expenses that are not paid with 529 distribution or scholarship to claim the credit.
For example if you have $28,000 in tuition a year, and $6000 tuition scholarship, the adjusted qualified education expenses (AQEE) would be $22,000, add books and it might be $23,000. If you qualify for AOTC you could claim $4,000 of that and take the rest of $19,000 from the 529, as well as any room and board expenses.
Thanks for the responses - I think I was mixing up on campus and off-campus distribution rules. I believe we are just above the income threshold for AOTC, so at least that’s less math for me to do.
I keep reading different online 529 guides but I feel like I’ll still be confused when it comes time to file taxes. So it doesn’t seem like there is a huge penalty for using a small amount of the 529 money for something else and the IRS isn’t going to come after me if I report that I withdrew slightly more than my D’s QHEE.
For anyone more savvy with 529s, could you also take the student loan if you needed it to pay the bill and then pay it off with 529 money without penalty?
The 529 rules have changed over time, so it’s understandable if you have some confusion; some online guides probably haven’t kept up. (Computers initially were not a qualified expense, then they were for a few years, then they weren’t, now they are again.) As long as whoever receives a non-qualified distribution pays income taxes (and the 10% penalty, if applicable) on the earnings portion of that non-qualified distribution, there should be no issue with the IRS.
My experience in requesting 529 distributions is that the plan administrator will ask at the time of the request if some or all of the distribution is for non-qualified expenses. I’m not sure if the plan administrator passes this information along to the IRS, but what really matters is that the earnings portion of a non-qualified distribution gets reported as taxable income by the appropraite person (account owner or beneficiary, whoever receives the non-qulaified distribution).
You could do this, but I’m not sure why you would want to. The major limiting thing here is that a 529 distribution should be taken in the same calendar year in which the expense that it covers is paid. So you could pay spring semester tuition in January with proceeds from a loan, but if you wanted to pay the loan off with 529 money, you would have to take the 529 distribution for that purpose before the end of the following December. Even if it’s a subsidized loan where no interest has accrued to the borrower, you would still have loan origination fees to pay. As long as the 529 funds are available, you might as well use them, instead of jumping through the hoops of getting a loan, and then making sure that loan is paid off within the required timeframe.
Are you asking if paying off a student loan from an earlier year with funds from a 529 distribution in a later year (and there are no qualified expenses in the later year) is a qualified expense?