<p>If I don’t get the money back from the school, and merely deposit my own money back into the 529s (assuming I have it, as Hunt says), then I have no proof that the money was paid back from the school…I’ve still cashed out my 529s, and I have no receipt from the school that says otherwise. What you’re suggesting opens all sorts of doors to fraudulent activity, and there’s no way I’d venture down that path at this point. I’m just trying to straighten out the mess I’m already in, and not create a…a…tsunami (sorry for the reference, but I think you know what I mean).</p>
<p>I don’t mean to jump on you, ttparent, I know you’re trying to make some good suggestions. I’m just frustrated, that’s all. UCLA dad said it right, and I paraphrase: I’m sick of the *consult-your-accountant *blather. At this point now, does anybody reading this post need to consult his/her accountant on whether or not s/he should cash out 4 years of 529s to prepay? I don’t think so.</p>
<p>It seems to me that by selecting this option, OP was billed in advance for 4 years. Why can’t the college issue an accurate bill (1098-T) and take care of this?</p>
<p>That’s Another reason not to 529 any savings for college. Besides you can only make one move/year</p>
<p>I was thinking to add to our small remaining 529 for possible future grandkids but moving towards starting a separate fund that will later pass on to DS. I have retirement MFs and a self directed account. The self-directed gives me worries but also does better than the professionally managed MF.</p>
<p>In your shoes, with the tax penalties, I would smile, pay the money…and then file an amended tax return 2 years later pitting the tuition against the 529 money and ask for a refund. You might get it, because the IRS has the same problem. The tax code is too complicated for even them to understand. I personally think that it was brilliant of you to pre-pay your son’s tuition. You are completely protected from the next stock crash, unwinding derivatives bubble, bond debacle, whatever. Your money is going exactly where you intended for it to go and not into the hands of GS or a hungry hedge trader. Money is just a medium of exchange to get what you truly desire. You’ve used your for love and family honor, very admirable.
We hated our 529 plan way back, the service charges ate up any money earned, year after year. Other parents told us the same story. I moved money around in the account as much as I could, changing the investment distribution and as a result we didn’t lose a dime in the stock market crash. But, we concluded that the 529 is a poor investment vehicle. And a poor tax break.
So instead we spent our money on SAT prep courses and won large college scholarships. We also sent DS to dual hs/community college enrollment to fulfill almost all of his Freshman year credits. We also started buying lots of silver when it was $12 an ounce. That value has, of course, tripled. We’re not done yet. We’re going to use the government’s money and let the silver appreciate further. DS is starting college this Fall. His scholarships cover all but $5k of his tuition. He’s using the low interest Stafford Loan to cover that bit. He’ll have $20K in debt after his senior year but he’ll still have his silver to more than cover that debt and his 529 money. He’ll use this for his Master’s degree, and still have money left over from the silver. You might ask, why silver instead of gold? Look up the tax codes if you’re really curious, then talk to your local reputable gold/silver dealer (this is for those of you with younger children, you can still use this technique if you’re gutsy enough).</p>
<p>My understanding is that you can shift 529 money among your family members without tax penalties if it is “pure” 529 money – that went straight into the 529 from the parent (or other donor, such as grandparent). The donor technically owns the money until it comes out of the 529 and gets used. But for kids in the age cohort currently attending college, there were no 529s early in their lives. Many of us who started saving for these kids when they were little, put the money in UTMA/UGMA accounts. That money is owned in trust for the specific kid. If that money was then “moved” to a 529, it becomes a “UTMA 529”, not a normal 529, it is owned by the trust, not the donor, and it cannot be transferred to a sibling without tax penalties. This is just my understanding; I’m no expert. But this thread underscores the potential tax pitfalls.</p>
<p>OP here, a year later. My accountant did some finagling and managed to substantially decrease the penalty & interest, shifting tax responsibility from my son to me. Too technical to go into detail here, but the IRS bought it. Ending penalty + interest was in the $2000 range. Considering interest generated by this account over the last 18 years was WAY more, and considering tuition/room/board at this private school increased year over year by well more than that, we still came out on top.</p>
<p>MORAL OF STORY #1: If you prepay four years out of 529, you will be hit with extra taxes and penalties. Colleges do <em>not</em> issue statements for four years worth of payments. No college does this. They issue a statement for one year only, and the remaining three (or however many) years’ interest is subject to capital gains tax. Period, end of story.</p>
<p>MORAL OF STORY #2: If you are fortunate enough, as I was, to be able to prepay four full years of tuition/room/board, and in the end you have to pay a couple thousand $$ extra in taxes and penalty, you are indeed very fortunate. I feel embarrassed that I whined about this.</p>
<p>MORAL OF STORE #3: If you ignore #2 above, and this situation would still anger you, then do not prepay four years of tuition/room/board from your 529. Deal with the yearly hikes, and just be thankful you have the money to pay.</p>
<p>Thanks for your information and I think that attitude about this is great. I hate the “talk to your accountant” blather too, and it’s even worse when one has to say this to someone with a zero EFC who has never spoken to an accountant in his/her life. Also many accountants are totally in the dark about how it works with college payments. Throw financial aid and other curve balls in the mix,and they have to go scurrying back to the books and on the phone with the IRS, who are often no more knowledgeable. </p>
<p>I’m glad that i worked out, and I don’t think you should be embarrassed about bringing up the ridiculousness of the way this situation is with university, Plan, accountant, IRS all out of synch in this whole thing.</p>
<p>As the poster who resurrected this thread, I’m really glad that you decided to whine about this issue. I learned so much as a result of your posts, and it’ll save me money!</p>
<p>Since only a portion is in a 529, I’m planning to only use 529 money in the years in which I’m billed. I talked to the IRS and this should be OK. I likewise need to watch by Coverdale distributions.</p>
<p>Again, I learned a big lesson and am VERY grateful!</p>
<p>I, too, am glad the OP mentioned this. It may have had a relatively happy ending here, but others still need to be forewarned. My first reaction when I read the post was that the tax bill could end up being almost the equivalent of a fifth year in college. The numbers could have played out differently, and the accountant’s remedial measures are another variable.</p>
<p>This also led me to think about the prepaid money the college receives for years 2-4. I wonder if that sits in an escrow or trust account, or if it’s treated by the college as general receipts and sits on their balance sheet as such? If so, there is some risk that the kid will transfer out, and the college will be unable to make good on the refund. The degree of risk would vary widely from school to school, but it’s a concern.</p>
<p>The pre-paid plan I’m considering has an agreement which states the terms for refunds. Withdrawl (i.e., transfers), leaves of absence and academic dismissal are all terms for a refund. I’m not worrying about the school’s ability to pay this back, should the need occur.</p>