I’m working on son’s 529 room/board withdrawal and have a question. If lease for off campus non school owned apartment is $6000 for the academic year but the COA for on campus housing is $8000/ year, can we withdraw the full $8k or must we go with the lower amount of $6k (to be a qualified expense). He actually pays more than $6k bc gives roommate money for utilities and internet, etc, but it is all in roommate’s name and I doubt we can get detailed receipts for all that.
FWIW: Fidelity 529 rep confirmed today that for grocery purposes, we can use the COA board amount rather than save every receipt, so this makes me think the same would be true for rent. I should’ve asked but got distracted. TIA for any advice.
You use actual expenses, not to exceed the published COA. You need receipts in the event of an audit. They don’t need to be detailed. Even things like Venmo will suffice. Just making it up based on COA won’t though.
Kids don’t use cash anymore, so you will have a handy digital record for every qualified expense already! Just save and make sure it’s clear from who the payee is what the expense was (or keep contemporaneous notes- “electric bill paid to roommate” is sufficient.
Okay, thanks everyone. I’ll get Venmo transfers re utilities etc. the food thing is harder but since Fidelity told me I could use COA’s meal plan amount, I’m going with that. It’s not that much in any case.
Plan out all four years. Depending on how much money is in the account, it might just be easier to count on the 529 money to cover tuition all the way through and not bother with the other expenses… but of course if you’ve got a ton of money in the account, you’ll want to withdraw it to cover anything you can…
I think what they’re saying is…you’ll be fine using the schools COA.
@eyemgh is correct. However, using the schools COA is likely defensible. It’s not correct but it’s simple and likely wouldn’t cause you issue.
Truth is most likely overstate expenses. For one, you’re also supposed to deduct your tax credits and not claim them. Few probably do.
Secondly things like computers are an unknown. It’s why the entire thing, like withdrawing from an HSA, is on the honor system.
Not saying people cheat…I’m just saying that while there are clear directions I’m sure many are not compliant - unknowingly. Im sure people take travel or other things out too.
I know people that pay a semester in December but claim on the next years taxes bcuz that’s when the class was.
If you’re trying to do it right, then you know in your mind you tried your best.
I’ve never been audited. I hope never to be. I use turbo tax, answer honestly, and whether I end up behind or ahead a few bucks, I know I’m doing it the best I can. I’ll love with that.
I would disagree that claiming an extra $2,000 tax free would be accepted by the IRS with no receipts, just because the school publishes a higher price.
“You’ll probably get away with it” is very different.
I did say at the top that it’s not correct….what I’m saying is that few do or can keep track of exact expenses.
And I’m sure what Fidelity is saying is that using the school # is…for lack of a better term…a standard deduction.
I was simply commenting on what OP says Fidelity told them. I can see it keeping someone out of hot water….all I’m saying. I’m not saying Fidelity should be telling this to people.
My guess is…and it’s only a guess…most don’t claim their 529s properly. I’d assume from a matching expense year POV and an over withdrawal POV. Im sure many claim actual rent and food and not school published. Where my daughter goes off campus rent alone = the published COA. I’d assume many go above in their withdrawal in these cases. Not saying it’s right. I can just see it happening.
I’ve been reading the rules the last few days and I realize that I’ve erred. And I’m not planning on withdrawing for spring this month to try and get back into balance.
Until you really study it’s hard to get it right.
Bcuz I oversaved I also need to learn about the scholarship withdrawal which may help me out. May……any insights would be appreciated
Using 529 funds to purchase computer equipment isn’t an unknown. From IRS Pub 970, Tax Benefits for Education, in the 529 Chapter under Qualified Higher Education Expenses:
The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it’s to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn’t include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)
If someone claims $3k toward the computer but they spent $500, short of an audit, no one would know. That’s all I’m saying. I’m guessing it happens every day.
You are all twisting words.
Yes the rules are defined…just like in all things tax related.
I simply said not everyone follow them and because it’s honor system, this type of stuff likely happens. I do not condone it. I do not endorse it.
But like regular taxes if you looked at ten peoples 529 withdrawals given an identical situation, you’d probably see ten different amounts withdrawn.
The average Joe is not the CC user. Many go by gut, not the exact written language.
I’m just saying how I believe life is. I’m not endorsing that anyone cheat.
Back to the original post, I also said that while what Fidelity said isn’t correct, I can understand someone using that logic.
Nope, I didn’t miss anything. I directly quoted what I was responding to. There were no other words written by you in that post that even hinted about a 529 owner or beneficiary taking a 529 distribution for a computer or computer related purchase that exceeded the actual cost.
In all things tax related, the rules are definitely not defined for everything. One easy example: what is the defined rule as far as the timing goes for avoiding the 10% additional tax on a non-qualified 529 distribution when a beneficiary has received a tax-free scholarship or fellowship grant? Does the penalty-free distribution need to be taken in the same year that the scholarship or grant was received, or can the distribution be taken in a later year? If the answer is later, how much later? One year? Five? Ten? Find me the rule on that.
Really because I said the entire withdrawal thing is done on the honor system. Hence my comment about computer cost is an unknown. One can see tuition on their bill. An auditor can verify a schools tuition and their scholarship disbursement. But they don’t know what a computer costs unless they ask.
That’s my point. You take one little thing of an overall and twist it. You completely take things and apply a different context. But that’s fine.
And no I’m not advocating people do this. I’m saying the way it’s set up it happens.
I plan to bcuz I need to. The issue is it’s penalty free but not really bcuz I have to pay the tax on the gain. And the penalty is the expense ratios in a 529 are higher, in many cases, much higher than say a Vanguard index 500.
Since you’re supposed to claim in the year of payment I’d assume the scholarship withdrawal would be the same. This is because the idea is that you are not supposed to continue to grow the money when it’s not in play expense wise…ie so someone doesn’t claim 10 years later and have 10 more years growth.
Ugh! The fact that the IRS pub 970 is confusing is incredibly frustrating. If the tax code/law is X, then it should say X. But it’s ambiguous. Or at least inclined to more than one interpretation, which makes it by definition ambiguous. And the variety of responses testifies to that ambiguity. Even my accountant and my tax attorney were confused!
@tsbna44 I’m in the same boat re over 529’d. Need to figure out how to unload it with the least amount of penalty.
An auditor would have to ask to see a tuition bill, too. Different students at the same school will have different 529 qualified expenses that are billed directly by the school.
The 10% additional tax “penalty” and the tax paid on any earnings are two distinctly different things. And there are plenty of 529 plans out there that have offerings with very low expense ratios.
Making an assumption here, in my opinion, would be a mistake. There is nothing in the tax code and no IRS rule that addresses this timing question (in other words, there are no defined rules).