When DD1 went away to college in 2010, I paid the university (tuition, room and board) directly out of the 529 account. I also paid myself back out of the 529 for the actual money I gave her to buy books. But just now I realized that qualified education expenses add up to those two things, plus the LOANS! But I since I didn’t know that, I didn’t pull that portion of money out at the time. I did pull out money equal to the grants (and paid taxes on the gains for those amounts).
Now I’m wondering what to do. I still have quite a bit of money in there, and she’s graduated and working. I’d like to get that money out without penalty or taxes. Is doing these transactions in a later tax year okay?
For example, Tuition, Room and Board was, say $25K. Grants were 7K, Loans were 3K. So I paid the university’s bill ($15K) directly out of the 529 account. But QEE was $18K, so I missed out on the 3K from the loans.
No. Too late for DD1 unless she goes back to school. If you own the 529, you could change the beneficiary to a qualifying family member (even yourself). Why were loans taken out if there were sufficient funds in the 529?
Did you claim the AOTC on up to $4000 of loans used for QEE each year for 4 years (or was AGI too high)?
Thanks for the reply.
That’s my way for the kids to have skin in the game; I don’t think they should have education handed to them on a silver platter. They also had to earn their own pocket money.
If she goes back to school, will that open up all the previous years’ QEE that didn’t get utilized?
I do own the 529, and have DD2 currently in college. I’m plan to take advantage of the full QEE for her (including the loans).
Maybe by the time your daughter is 30 she will have a baby and 529 balance can be switched to her child.
You said this is DD1, are there other children in college or high school now?
There was way more qualified education expenses beyond $4000 in all years. In other words, my checks to the university added up to way more than $4000/year. In 2010, 2011 and 2012, I had $1500 in line 49 of the 1040. In 2013 I had $3000 (with two kids in school).
No, your D going back to school won’t open past expenses. Distributions have to be taken in the same year as the expenses are paid.
I haven’t crunched your numbers but you didn’t double-dip did you? Using expenses paid with 529 money to claim the AOTC? Or was that why you didn’t take distributions for the loan amounts?
Okay… do I understand this right? You had your kid take out loans, and then you got the tax benefit from the growth of the money in the 529 but do not intend to pay off the loan (and never did intend to)? My sympathy level is low…
It sounds like you outsmarted yourself. You can always change the beneficiary of the 529 to DD2, if she needs extra money for college. Or, as Madison85 has suggested, save the 529 for any future children that DD1 might have.
What were the loans used for? If it was for spending money, it’s not QEE and you couldn’t have repaid yourself with that money anyway. If it was for tuition, then yes, you missed the reimbursement window, which is only the tax year the expenses were incurred.
Your checks to the university were higher than $4000, but that $4000 had to be from non-benefitted funds, non-529 funds. If you paid the university $15000 but reimbursed yourself $15000, you’ve paid no OOP. and shouldn’t take the AOTC.
The money in the 529 never would have lasted four years without the loans, given that my elder daughter selected a private school. She ran the account dry, so got the benefit of every dollar in her 529. So how does that square with the “quite a bit of money in there”? Well, I left out the part that my younger daughter (3 years younger), starting with the same balance, selected a state school, and so is projected to have a large excess. So now the exercise I’m working on is to manage beneficiaries and pull out (tax free) money equal to the loans, and pull out (tax on gains, no penalty) money equal to the scholarships and grants, all to avoid the penalty.
Oh, and I’m only trying to get the money out efficiently for the benefit of my younger daughter. She would like the money for a downpayment on a house and to get a car, but said she’d rather leave it for her kids than pay a penalty.
Is that in an IRS publication somewhere? How is that worded (so I can find it)?
Assuming this is your younger D’s 529 (don’t see how other kid’s matters at all), you still want to use the money to pay expenses your KID is going to pay through loans. Regardless of whether you “saved too much” for your younger kid’s education, you still want a tax benefit for money you don’t intend to spend on her education (SHE is going to be spending it with loan payments over several years). Unless you do intend to pay off her loans for her (but given your skin in the game comment, I am assuming not).
I’m not sure where exactly it is in the IRS pubs, but here’s some relevant information from a recognized subject matter expert:
http://www.savingforcollege.com/articles/the-best-way-to-withdraw-529-funds
@sengsational What do you mean exactly when you say pull out money (from the 529) tax free to pay loans?
Distributions from a 529 cannot be used to pay off loans without incurring any applicable tax/penalty unless the loan was taken in the same year as the distribution (and the loan proceeds were used for allowed expenses).
Try IRS Publication 970, at irs.gov
I think I said “equal to the loans”. The qualified expenses add-up to what I paid to the university plus the amount of the loans. I only took advantage of what I paid to the univerisity, so there’s still some QEE left on the table that I didn’t take advantage of.
IRS Pub 970, chapter 8
http://www.irs.gov/pub/irs-pdf/p970.pdf
It doesn’t really say that in so many words, it’s implied by the way taxes generally work. In order to not pay tax on a 529 distribution taken in a given year, you need to have paid qualified expenses in that year. You can google this to get the opinions of investment magazines, brokerage firms etc. that will say it in so many words.
Unless that QEE that’s still on the table was incurred/billed in 2015, it’s too late to “take advantage” of it with 529 money.
Yes, that is the disappointing news I’ve received here today 