Yea, I don’t know why they don’t just charge capital gains.
You do get to pull money to offset their scholarships without penalty. I think that’s where the timing is controversial. Since it isn’t specified, I’d still pull it. If audited, which is highly unlikely, you have a very reasonable defense that timing isn’t outlined in the statute. Worst case, you pay the penalty.
How specific/fine-grained do you want to invest? All of my 529s have been in an aggressive stock/fund portfolio since I started investing them. I got the tax break on the initial contribution, tax-free withdrawals, and the same returns as any investment in the same portfolio.
It’s been a while, but I bypassed all of the pre-defined/age-based/etc. offerings and just selected a custom investment portfolio from Fidelity’s broad offerings. There are likely some limitations - I probably can’t day-trade or speculate with options/futures - but I didn’t run into limits for what I was doing. If a plan doesn’t offer this, look for one that does. There is no requirement to use your state’s plan (though some states may still limit the tax break - mine doesn’t).
Given that, I don’t see why I would choose the same investments without the tax advantages.
If there are still “pre-paid tuition” 529s - you get a defined benefit and no say in investing - I can see this. But I discounted those plans very quickly.
Even if you choose another path, look for the short-term loophole to at least get the state tax break, if available.
At first blush your idea might strike some readers as far-fetched. Surely states wouldn’t give someone a tax break just for putting money into a 529 account for a few days, right? But the surprising answer is that many states do allow this, imposing no waiting period on 529 withdrawals and allowing account holders to deduct contributions from their state income taxes regardless of how long the money is held in the account.
For families with near-term college expenses, this 529 tax loophole can be a relatively easy way to lower their state income tax bill in the process of paying tuition, room and board, and other college-related costs.
Sure there’s a way to know how much is spent on food off campus, it’s just a real pain in the you-know-what because it involves diligently tracking expenses all semester long.
Sorry, transportation is not a 529 qualified expense.
The 529 distributions have to be done in the same that the matching expenses were paid.
It doesn’t matter what the aid is called – scholarship, grant, Podunk Rotary Club Student Assistance, etc. If it was tax-free aid that was used to pay for a 529 qualified expense, the earnings portion of a non-qualified 529 distribution of equal amount is likely exempt from the 10% additional tax (“penalty”).
I can’t imagine it’s that hard to track food expenses. The college kids I know NEVER carry cash. It’s not like in our day where you could spend $50 you got when cashed a check at the campus bookstore and not know where the heck the money went. College students are using online payments for everything- and it’s all nicely tracked for you.
Thx
Airfare (or any travel) is not a qualified expense. You have to watch the study abroad fees. When my daughter went, I assumed the $9000 we paid was tuition. Nope. It was made up of fees, and more fees, and more fees for things like advising and bus passes. When the 1098T came none of the $9000 was on it even though she went through a program offered by her college with her getting direct credit for courses (with the same course numbers) on her transcript.
It was so complicated I decided not to use that year for the tax benefits. I don’t know what would have been allowed from a 529 withdrawal to pay those fees. I know the fees for insurance and transportation would not have been allowed. There were some fees for room and board that would have been allowed. It was pulling teeth to get a breakdown.
That’s where you guestimate - i mean, it’s all the Honor System and i’m not overly taking advantage, hence I’m over funded - but I’m going to claim what’s legit. If i have to guess, so be it - and i’ll worry if i ever get questioned which is highly unlikely.
Similar to an HSA, it’s all based on what you believe is right to claim.
My daughter is going on a May trip for study to Puerto Rico. Was supposed to be the Republic of GA but Covid Killed that.
But if she goes to China for a semester, I would assume the airfare there would count? But I don’t know…you can be assured I’ll be looking 
Uhh… no. It’s not up to what you believe is right to claim. There are specific statutes, regulations and rules that spell out what are qualified expenses for both 529 and HSA expenditures.
No. Airfare is transportation, and transportation is never a 529 qualified expense. Some things are complicated. This particular 529 rule is not.
If schools break out the fees students pay, several of them are not qualified expenses, like bus service around campus (transportation), health insurance. For study abroad, the cost of the airline ticket, passport and visa is not a QEE
If she goes to China, she’ll have a lot of these fees that aren’t QEE. When my niece went to France, she had to get a visa and the cost of applying for it, traveling to Los Angeles to interview (airfare, hotel, food), all the travel around Europe (even though educational) was not QEE.
Of the fees charges when my daughter was in London, I could have justified a few hundred out of the $9000 the program cost. They allotted it all to fees and nothing to tuition. If I’d been pulling it out of a 529, I think I could have claimed $3000 for her room (it was a live with someone in their home program) but I was trying to take the AOTC and room and board is not a QEE for the AOTC.
On
Y first comment, yes you are guided by rules. I’m simply saying there is no mechanism. You claim what you claim. They ask you for an amount. I’m sure there’s books or food or something people leave off. Yes there’s rules that are black and white but in the end you go onto your account and u claim a total amount….it’s all I meant.
As for the airfare b4 studying abroad I will bone up. Perhaps if it’s included in tuition, etc. a lot of times depending on how something is worded or packaged can make a huge difference.
Thx
Believe it or not, we have receipts for everything, including rent, groceries, and meals out.
What do you mean “you claim what you claim”? There is a mechanism - read and understand the rules, and comply with the rules.
Airfare is not included in tuition. Period. These are two very distinct things.
Yes, I already claim money on the 529. I’m simply saying - it asks how much I want.
There is no itemization. That’s all I’m saying.
Yes, I understand my “claims” need to be within the rules.
Anyway, let’s move on.
Your 529 account administrator is not an agent of the IRS. That’s why the account administrator does not ask what you are using the distributions for. It’s between you and the IRS.
If and when they ask, which they probably won’t.
On the odd chance they might, I’ve always documented everything within the guidelines, but each person has to make those calculations for themselves.
Now, since we’re straying, and @tsbna44 has said that it’s ok to put this to rest, let’s do that.
My last words on this:
I have been asked by the IRS, which although slightly annoying was otherwise uneventful because A) I understood the rules and B) I also carefully documented everything.
For students off campus, you are allowed to take an amount for room and board from the 529 equal to the “cost of attendance” published by the college. Each college should provide this information.
OP here. I have a related question.
Once the student goes to OOS school, are they considered resident from the 2nd year for tuition purposes, or do they remain OOS student for all 4 years?
What if the parents move to the same state before 2nd year? Would the student still considered as OOS?