Best way to make first 529 withdrawals?

If you have a joint checking account with your son, make him primary and that way everything will be reported under his name and SSN. This is what I did with my kids. 529 distributions went out electronically under the student’s name to the joint checking account. It usually took two or three business days from the telephone or online distribution request for the funds to show up in the checking account. From there, the student either wrote the check to pay the school’s direct costs (this forces the student to have a complete understanding of how much their education actually costs, which is a lesson I could have benefited from in my college days), or, since I had access to the checking account, 529 funds that were meant to reimburse me for qualified expenses that I paid with my own money could be easily transferred out for reimbursement. After a few semesters it became natural to do it this way. Just make sure that 529 distributions and payment for the expenses they are meant to cover happen in the same year.

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Happy to hear it worked out for you. For blossom too. Just saying that my experience was different. And my kid’s school was very pleasant in terms of the conversation, and was I (and it was clear they had had similar conversations with other parents as well) but they made it very clear they would not change their due date for payments upon request to do so.

My larger point though was that I often see people here assuming that their experience/circumstances are the same as everyone else. That just isn’t the case. Don’t think that should be controversial but it often appears to be.

And I acknowledged that different people likely would have different views on the entitlement comment.

That’s one reason why blossom was encouraging people to make the phone call and ask - blossom even wrote, emphatically, “Make the phone call before you assume!!!”

Thank you!!! This is what I wanted to learn. Definitely him the primary, I just didn’t know if I’m the secondary if I’d still be considered an “owner” and I’d end up linked to the 1099-Q somehow. But then I didn’t want to have to bug him for access to his own checking account and feel like I’m on the sly hehe.

Of course it would also be super easy to just buy his computer and stuff with my CC and reimburse myself from the 529, and I know audits are unlikely, this just sounds like an area that may be more of a “flag” than say, HSA expense reimbursements are.

I agree with having him pay the tuition directly too. I never saw a college bill in my day, and I probably should have. I want him to learn to do this stuff, but still retain enough access to guide him as necessary. And the last thing I want to do is chase him down for some money he “owes” me.

I also like the idea of paying the school and reimbursing later. I too like control over who is getting my money and when, and making sure every bill is correct. Auto-pay with the cable bill, but not much else for me :).

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That’s good to hear, thank you. I’m going to try to keep stuff under his name, but I won’t sweat it if I mess up or for some reason the reimbursement ends up linked to me.

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I will assume that the 2 users dominating recent posts with pedanticism will take their OT one-upsmanship posts to PM if they feel the burning urge to continue. Several posts deleted. Let’s get back to topic please

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@BelknapPoint 's system sounds pretty good, especially if you have the joint account set up already. And since you are the one initiating the transfer for tuition payments, you are still in the loop and can follow up/keep an eye out to make sure it gets paid, while student has the responsibility and awareness of making the payments.

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My kids have had the same bank accounts since they were babies. We added checking accounts (it’s a credit union) when they were about 15, and they still use them as their primary accounts. One account, for the one in grad school, is still tied to mine and I can see if there are any issues with her account (fraud, a refund check or paycheck didn’t post). I usually don’t care what she’s doing with her money, but it is easy to check if something goes wrong.

I live near the credit union so I can pop in if there are any problems. We didn’t feel it was necessary to open another account near the college. For tax info, it is on her account for her info, mine for mine (all statements online). At the same credit union, I’m also listed as co-owner on my mother’s accounts and there has never been a problem with tax info for them.

This would be a new account as previously he just had the Capital One money accounts like the rest of my kids (for allowances, gifts, etc.). But those have no ATM access and are pretty limited. I’m looking to set one up with his school’s credit union as that should be a cheap and convenient way for him to bank on campus. So I just wanted to open it correctly from the start. I can always be removed as a joint owner later on when he’s more self-sufficient.

@BelknapPoint Just to confirm, since the thread got a little wacky, that making all withdrawals to the beneficiary is primarily what you do? I know others have chimed in with both their successes with the IRS and the occasional spreadsheet needed for support, but do you continue to avoid any withdrawals to owner at all times?

Thanks so much for helping out!

I haven’t done distributions directly to the school because of advice I read from Joe Hurley years ago on Saving for College: schools might mistakenly count a payment received directly from a 529 administrator as an outside scholarship, with a possible reduction in institutional need-based aid. Of course, this can always be cleaned up after the fact, but who needs the hassle. Also, I like the control that is present when the 529 funds are distributed to and then disbursed by the student.

For accounting and tax simplicity, I prefer that the 529 distributions go to the student. This way, the 1099-Q tax reporting document prepared by the 529 administrator will always be issued under the student’s name and SSN. If for some reason the IRS questions the use of the funds and won’t accept that every cent was used for qualified education expenses, at the very least the tax hit should be smaller if the earnings portion from a distribution deemed as non-qualified is reportable on the tax return of the student instead of the parent(s).

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Perfect! That aligns with my thinking as well. I get enough financial/administrative hassles that I don’t bring on myself, last thing I want to do is invite a new one.

I have always had the withdrawals made out to myself as the owner. I did it for the following reasons:

  1. Two of my kid’s schools did not charge a fee to use a credit card. I therefore paid by credit card and reimbursed myself from the 529.
  2. You can make the withdrawal anytime during the year you want. I was once in a cash-flow crunch and did the 529 withdrawal way before the semester. When the bill eventually came, paid it out of current cash flows. In other words, the 529 withdrawal was a short term loan to myself.
  3. I personally wouldn’t bother to open up a new joint checking with my child as the primary SS just to have the withdrawal’s going to the beneficiary. It is totally fine to have the disbursements made to the owner. I get the point about the IRS potentially concluding a withdrawal was non-qualified and therefore better taxed at the child’s rate. Maybe I’m naïve, but I keep good records and therefore do not feel the need to guard against that with any inconvenience.

I find these threads interesting because the gov’t gives you flexibility to make the withdrawals and the response is people overthinking it.

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Several years ago one of my kids received a CP2000 Notice from the IRS questioning the use of 529 funds and requesting more than $5,000 in “underpaid” taxes. The notice was generated by a computer using whatever algorithm the IRS uses, but it was complete BS. I had to make a trip to an IRS office with all the documentation I had showing why every 529 distribution was used only for qualified expenses, and everything was eventually resolved in favor of my kid, but it was a real PITA. If the distribution had been made to me instead of my kid and the IRS had not eventually seen things correctly, the “underpaid” tax amount due would have been a lot more.

There are certainly valid reasons to have a 529 distribution go to the account owner instead of the student beneficiary, but absent any of those reasons I think an ounce of prevention is well worth the pound of cure that may be needed down the road. Opening a joint checking account with the student as the primary account holder, or adding a parent to an already existing student account, is comparatively simple and can be that ounce of prevention (in my opinion).

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Do you have any further info on how this might happen? I’ve been sending the 529 checks directly to the school for tuition payments because I thought it kept things much simpler. Perhaps I was wrong. In my case, they get mailed to the specific address listed in the payment portal for 529 checks. The 529 check details on the institution website list the 529 owner and beneficiary. Wouldn’t the school see these details and that check came from Fidelity or Vanguard rather than a scholarship foundation? Seems like this would be easily resolved at the school. What am I missing? Thanks.

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There certainly is more than one way to do this. What you’re suggesting clearly works and has the benefit of some extra caution. One point to note is even though you did things more cautiously, you still got a notice from the IRS. But your point is valid about if the IRS does not see things correctly. For the record, I too once received a notice from the IRS about 529 usage. I did not need to go down to an office. I replied via mail with my supporting documentation. It was a PITA, but it worked out ok. My last child is about to start college. I plan to do things similar to the way I did it in the past. For part of the money, however, my child is the owner. So, those withdrawals have to go to her.

It might happen if someone at the school doesn’t pay attention and makes a mistake. It’s probably more likely to happen at a larger school when thousands of payments are being processed in a short amount of time and attention to detail goes out the window.

Thank you everyone for the input. It confirms that just like in all the articles I read, there are pro’s and con’s to all 3 ways of making withdrawals. And @BelknapPoint gives a good reminder that even when you’re trying to avoid a PITA the IRS will give you one anyway.

I’m like you guys, with the spreadsheets, the databases of scanned records and receipts neatly organized, the financial software that tags and tracks every reimbursable expense, etc. Perhaps we’re a self-selecting meticulous group that often ends up with a PITA to back up for someone (who likely didn’t do their ONE job).

Yes, I’m an admitted over-thinker, sometimes to my detriment but often to my benefit :). Like I do with all sorts of financial and family matters, trust, verify and keep copious records.

Just want to say to your points, technically nos. 1 & 2 could still be done through the beneficiary. You just transfer the money back to you just like you would after paying for a qualified expense at the time it is incurred. Hopefully a new student card I help him find will have a decent rewards program if there was a no-fee opportunity to use a CC for tuition. And for point 3, he needs a good checking account regardless of if it is joint or not. His online checking account is very much online only with no ATMs in our state, so that’s why I wanted to get it set up in the right way from the start.

All good usage scenarios though!!

I think you’re right. If I put the tuition on my credit card and withdraw the 529 money into the child account (assuming for a moment it is not a joint account), I see no reason the money could not be transferred back to the parent and still be a qualified withdrawal. The old line that money is fungible. Similar thinking for withdrawing the money early if needed.

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