I have read that when withdrawing 529 funds you should not have the funds go to the account owner (parents) but to the beneficiary (student) so that the annual 1099-Q from the IRS will go to the child and may not get as much scrutiny to justify the qualified educational expenses with related documentation, receipts, etc. when they file their tax returns.
What is we have a joint bank account, who gets the 1099-Q? Should we set-up a separate bank account for the student?
Any words of wisdom on this issue or anything else I should be thinking about?
If the withdrawal goes to your student (with her/his SSN), your child will get the 1099Q, regardless where s/he deposits the money. Another alternative is to have the fund sent directly to the college, which simplifies any tax consideration.
Whether you have an online brokerage or are filling out a paper form, there should be an option to have the money sent directly to the college. This is ideal for tax purposes.
Yes, but you lose complete control over the funds. For example, buying a computer is an eligible expense and the ones sold at at colleges are sometimes more expensive so we might want to deposit the funds in our bank account and buy the computer ourselves, etc?
Maybe tuition payments should be sent directly to the college but supplies and other expenses would be better to have funds deposited into our bank accounts?
You can’t pay for off campus housing directly through the school either.
Unless someone comes up with a reason not to, I’m having the distributions paid to me. The only warning I’ve heard against that is that if there are non-qualified withdrawals I’ll probably be paying a higher tax rate on the money than my son would be had it was reported on his taxes instead, but we don’t plan on making non-qualified withdrawals.
We have 529 funds for tuition, room and board, mandatory fees, etc sent directly to the school. This year my daughter lived off campus in an apartment. My husband pays the rent to the landlord each month and has the 529 reimburse him directly. We keep very good records of the rent receipts. We do the same for books purchased with a credit/debit card from the campus bookstore and Amazon. We’ve been doing this for 4 years and no tax problems, knock on wood. Make sure the expense and reimbursement fall in the same calendar year for tax purposes. If you use the money for a proper purpose you should be fine.
I had gone into this thinking sending directly to the school would be the easiest, but the school says they would prefer you had the funds sent to you.
They said the issues are payments not making it on time, being credited to a wrong account, or being rejected because of overpayment. That one intrigued me and I asked someone at one of our visits. Apparently if the 529 sends more than the total due, they reject it! I could see this easily happening if some other financial aid goes through you weren’t expecting between the time you request the funds and them getting the check. Why they don’t just have a credit on the account is beyond me, but it was enough to scare me from going that route though. I’m sure not all schools do it that way, but since DS’s does…
We’re deciding this too. Apparently it can take a couple of weeks for the money to get from the 529 to the university, so some have incurred late fees. I saw that our tuition bill will be posted July 15 and due August 1. So, we are thinking of having the funds transferred into our account ahead of time and doing the transfer ourselves because that should be fast once it is liquidated.
As far as tax time, if you are spending a lot more than the college’s fees, like off campus living, then you need to keep good records and don’t go over. I believe you can also count books and computer. . Most people do not get audited on this but I think they are starting to do it more. If you have the receipts, you are fine. You just answer any audit with those.
One thought about taxes - if you qualify income-wise for AOTC, think about paying 4000 of expenses out of pocket, not out of the 529. Then you can get the full credit if you qualify (can’t remember what the income limits are). If you use all tax advantaged 529 money you should not take the AOTC because you have already had a tax break on that money. $4000 is the max amount used to calculate AOTC, which is $2500 credit if your income is under the cap.
We sent the bills to 529 and they paid the school directly. I don’t know how we will do it next year as D19 will be living off campus.
But I came here for a question. So we received $3000 housing reimbursement from the school due school changed to online since early March. We gave DD the money and she deposited in her account, not thinking much about the money coming from 529. What will happen with that $3000 in term of tax? Will we be penalized and what should we do with the $3000 to make it compliance?
We had all 529 funds transferred into our personal checking and I paid all the bills when my son’s lived on campus. Once they moved off-campus, I still had the 529 funds transferred into my account then I transferred rent/utilities etc… into my son’s bank account so they could pay their bills. I still paid their tuition and did this for both son’s with no IRS issues.
@Nhatrang - I googled that question last week after getting refunded for one of our college kids and it was recommended to deposit the refund back into the 529 account to avoid taxes and penalty so that’s what I’m doing.
@Nhatrang and @leftrightleft , my 529 said that housing refunds can be used for qualified expenses in the same year (2020), (meaning you keep the money until you use it for upcoming 2020 bills), or deposited back in to the 529 account. So Nhatrang needs to use her $3000 for upcoming school bills this year and make sure that it is documented.
As for the OP, my D17 is entering her senior year and we send payments all three ways: Directly to the school for tuition, to D for reimbursement of supplies and for off campus rent, and sometimes to us parents if we paid the expense (such as a laptop).