Leftover College Tuition in 529?

[4kidsdad]

but there might not be a penalty if the parent is over 59 1/2.

Incorrect. See IRS Pub 970

Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.

Exceptions. The 10% additional tax doesn’t apply to the following distributions.

1.Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

2.Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can’t do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

3.Included in income because the designated beneficiary received:

a.A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

b.Veterans’ educational assistance (see Veterans’ Benefits in chapter 1);

c.Employer-provided educational assistance (see chapter 11 ); or

d.Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

4.Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USNA at Annapolis). This exception applies only to the extent that the amount of the distribution doesn’t exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

5.Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier).

Exception (3) applies only to the extent the distribution isn’t more than the scholarship, allowance, or payment.

[techmom99]

@4kidsdad -

I’m glad I hedged by saying maybe. I’m not sure where I read the 59 1/2 number but I must have gotten myself confused with IRA and 401k distributions.

I did also learn in (belated) fact checking that you can’t use 529 money to repay student loans. I took out a loan for my middle child, who is still in college, for one semester before I received a small inheritance. I’ve put most of the inheritance into 529’s because the elderly relative who left me the bequest wanted me to use it for my kids. I had hoped to use it to repay that loan but that isn’t considered a qualified withdrawal. The loan isn’t due to start repayment until 6 months after that child leaves school, so I will deal with the repayment then.

[LBowie]

@4kidsdad I am in Massachusetts. According to this Bogleheads wiki, I can’t transfer ownership (but perhaps the original poster’s California parents can.)
https://www.bogleheads.org/wiki/529_plan_account_transfers

And, yes, I thought so about being taxed at my rate, at least at the moment. My son is under 24.

[BelknapPoint]

I am in Massachusetts. According to this Bogleheads wiki, I can’t transfer ownership (but perhaps the original poster’s California parents can.)
529 plan account transfers - Bogleheads

I’m pretty sure that any restriction on transfer of account ownership is based on the rules of the plan that you have an account with, and not your state of residence. I would look at your plan documentation or ask your plan administrator.

And, yes, I thought so about being taxed at my rate, at least at the moment. My son is under 24.

Whether or not a young taxpayer is subject to the “kiddie tax” is based on a number of factors, including the total amount of unearned income for the tax year. Generally, for 2016, the taxpayer would have to have more than $2,100 in unearned income for anything to be taxed at the parent’s potentially higher tax rate, as well as meet the other requirements to be subject to the “kiddie tax.”

[LBowie]

It’s the Fidelity U.Fund/MEFA plan, so same as state of residence. The small excess will stay for either grad school (no plan at this point, though) or more likely move to his brother whose tuition seems more expensive.

Thank you for your advice. I will definitely consult with our tax specialist as needed. Do you think we scared away the original poster yet with all this tax talk?

[bookworm]

Can we transfer to a grandchild?

[BelknapPoint]

Can we transfer to a grandchild?

If you’re the account owner and you’re asking if you can change the beneficiary to a grandchild, the answer is almost certainly yes. If you’re asking if you can change ownership from you to a grandchild, that depends on the rules of the plan.

[tenpinbowler]

My father will be transferring the leftover money in the college tuition to my name once I am finished with school. He intended the money to be all used for the bachelor’s degree, since the U Cal system is expensive. However, seeing as I will not be using all of the funding, I will have leftover tuition money that I can use for either higher education (grad shcool) or getting my life started.

[tenpinbowler]

I will also not be having children… so that’s not a concern.

[donnaleighg]

using it for “getting your life started” will mean paying a penalty on the earnings.