529 questions for those drawing from them currently

Nebraska_Disney

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Mar 15, 2009
My son will be starting college next fall and has done really well academically and will have close to all his expenses, including room and board, covered by his school. We also have been saving for him in a 529 account since he was born. From what I can tell, there are possible penalties to the earnings if he does not have qualified expenses to use them on. Can anyone provide some details on how it has worked for them as they start drawing on their own accounts? Anyone else run into this themselves?
 

MomToOne

DIS Veteran
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Mar 18, 2010
You can withdraw the tax-free scholarship amount without getting hit with the 10% penalty, but you will have to pay tax on the earnings (not the money you invested - just the amount of growth it had), like you would have had to pay if the money had been put into a regular savings account instead of a 529. Any scholarship amount that is taxed (a separate topic altogether) does not fall under this exemption I believe.

Another option is to transfer the funds to another beneficiary such as another child, a niece/nephew, etc. Or even save it for a grandchild.

Also remember things like a laptop can be paid for with 529 funds - if you are buying anything for him related to school, google it to see if you can pay for it with 529 funds. I bought a printer ink cartridge for DD yesterday that can be paid for out of the 529.
 
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DLgal

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Joined
Feb 12, 2013
Leave the funds in there and continue contributing. If he decides to go to graduate school, he can use it for that. Graduate degrees are insanely expensive.

My kids are not 4 year college bound, due to special needs, but we are continuing to contribute to their 529s because they can use those funds for ANY education (trade school, certification programs, vocational education, community college courses, etc).
 
  • crisi

    DIS Veteran
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    Feb 25, 2002
    Another thing to remember is that scholarships often come with GPA maintenance requirements - he may discover that college is a lot harder than high school, or he may have a medical emergency that brings down his GPA. And then there are the things parents don't want to think about - being too hungover for class too often, getting a significant other who eats up study time. You may yet need a lot of that money to pay for undergrad tuition. I hope not, but my daughter is starting her Sophomore year, and my Facebook feed is full of parents of her classmates who didn't manage to keep the scholarship for year two and the parents are now scrambling to find the money.
     

    runwad

    Dis Veteran
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    Jan 18, 2006
    Will he live in a dorm all 4 years or want to move out to an apartment? If so you can use the 529 for the apartment rent. You can withdraw up the amount of the school room and board, which isn't usually a problem, I've never heard of anyone's rent being more than the dorm fee.
     

    clh2

    <font color=green>I am the Pixie Stick NARC at my
    Joined
    Jul 15, 2003
    Are there any other children in your family? You can change the beneficiary to a different family member. (Previously mentioned).

    College books are really expensive, so if those aren’t covered by his scholarships, are a qualified expense for the 529.
     

    Nebraska_Disney

    DIS Veteran
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    Mar 15, 2009
    Thanks for the feedback. His program is a 5 year program that he will graduate with masters degree. Each of my 2 kids have their own accounts which they have put money into along with what we have put in. Grandpa and Grandma also have provided funds to these accounts. At the end of the day, they each get what is in their accounts and nothing more from us. That leaves out transferring. Right now, he has full tuition paid and $12K more a year towards room and board and other expenses. Yes, we will have some expenses, but not emptying his 529, which will have about $55K in it by next fall. I’m going to withdraw all I can and put it into a savings account. Just trying to be strategic on the rest.
     
  • DLgal

    DIS Veteran
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    Feb 12, 2013
    Thanks for the feedback. His program is a 5 year program that he will graduate with masters degree. Each of my 2 kids have their own accounts which they have put money into along with what we have put in. Grandpa and Grandma also have provided funds to these accounts. At the end of the day, they each get what is in their accounts and nothing more from us. That leaves out transferring. Right now, he has full tuition paid and $12K more a year towards room and board and other expenses. Yes, we will have some expenses, but not emptying his 529, which will have about $55K in it by next fall. I’m going to withdraw all I can and put it into a savings account. Just trying to be strategic on the rest.
    Don't empty it! You will take a huge hit on it, taxes and penalties wise. You can let it grow for another 5 years. When your son is done with school, let him decide what he wants to do with it, if you plan to let him have it.
     

    Nebraska_Disney

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    Mar 15, 2009
    Don't empty it! You will take a huge hit on it, taxes and penalties wise. You can let it grow for another 5 years. When your son is done with school, let him decide what he wants to do with it, if you plan to let him have it.
    I’m planning to take out, each semester, that amount which I am allowed to and put it into a savings account for him.
     

    MomToOne

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    Mar 18, 2010
    I’m planning to take out, each semester, that amount which I am allowed to and put it into a savings account for him.
    When you have it withdrawn, look into whether or not it is better to have it paid out to your son, or you. If it is paid out to him, the earnings portion might be taxed at his rate, not yours, which I assume is lower. Check with your tax professional on this - I'm not completely sure about it. (Even without your specific issue, I have all payouts go to my daughter, and then she repays me anything I have "loaned" to her to cover tuition, etc. up front from the distribution. I have so far avoided getting any letters from the IRS demanding to know why this money wasn't claimed on my return, which some people apparently get when they have the withdrawals go straight to the parents instead of the student or directly to the school. A letter back to the IRS generally resolves the question from what I've read, but I figured I'd rather just avoid that whole back and forth if I could.)

    Of course, this only works if you trust him to put the money aside and not spend it on things you don't want him to spend it on. I am still a co-owner on my daughter's credit union account (just haven't bothered to remove it since she turned 18), so when I receive the notification that a distribution was completed, I quickly jump online and transfer anything I am due to my account. Not that I don't trust her to repay me, but she isn't the best at details and could easily spend it without knowing.
     
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    crisi

    DIS Veteran
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    Feb 25, 2002
    We are in a similar situation - I saved enough for my daughter without her scholarship - and she'll have extra. My son chose trade school. I'll end up paying taxes on the earnings, but I'm planning on giving that money to him when he's responsible enough for a house (which isn't yet). He'll also need tools and such for starting school.

    He may also decide to do something else. i.e. get his PhD after his masters, switch majors, end up in law school. Don't worry about the dispersals for another five years :).
     
  • DLgal

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    Feb 12, 2013
    When you have it withdrawn, look into whether or not it is better to have it paid out to your son, or you. If it is paid out to him, the earnings portion might be taxed at his rate, not yours, which I assume is lower. Check with your tax professional on this - I'm not completely sure about it. (Even without your specific issue, I have all payouts go to my daughter, and then she repays me anything I have "loaned" to her to cover tuition, etc. up front from the distribution. I have so far avoided getting any letters from the IRS demanding to know why this money wasn't claimed on my return, which some people apparently get when they have the withdrawals go straight to the parents instead of the student or directly to the school. A letter back to the IRS generally resolves the question from what I've read, but I figured I'd rather just avoid that whole back and forth if I could.)

    Of course, this only works if you trust him to put the money aside and not spend it on things you don't want him to spend it on. I am still a co-owner on my daughter's credit union account (just haven't bothered to remove it since she turned 18), so when I receive the notification that a distribution was completed, I quickly jump online and transfer anything I am due to my account. Not that I don't trust her to repay me, but she isn't the best at details and could easily spend it without knowing.
    Right. The earnings will be taxed as INCOME, so you would want to withdraw it and deposit it in the son's name, as his tax rate will likely be very little to nothing, as he is a student and if he doesn't have another job, may not even reach the threshold for owing taxes. As of now, the 529 account technically belongs to the son anyway (at least, that is how I understand it as my kids SSNs are tied to their accounts, so I assume the money is legally theirs as beneficiaries).

    Have you talked to a financial advisor?
     

    Nebraska_Disney

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    Mar 15, 2009
    Lots of great advice here, it is appreciated.

    One thing I have thought of through these discussions.......are the "earnings" of the 529 withdrawn differently from the rest? First in, first out? How is it determined if you are using the earnings versus what you put in of your own, post-taxed funds? I'd prefer to use his earnings on expenses we do have and leave the principal of what we contributed in place. My reasoning is I'd have a smaller earnings residual at the end. Does this sound reasonable for those who have done this?

    No, I have not reached out to a financial adviser yet. Planning on it as we get past our 2019 tax season.
     

    BridgetBordeaux

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    Jun 27, 2008
    Lots of great advice here, it is appreciated.

    One thing I have thought of through these discussions.......are the "earnings" of the 529 withdrawn differently from the rest? First in, first out? How is it determined if you are using the earnings versus what you put in of your own, post-taxed funds? I'd prefer to use his earnings on expenses we do have and leave the principal of what we contributed in place. My reasoning is I'd have a smaller earnings residual at the end. Does this sound reasonable for those who have done this?

    No, I have not reached out to a financial adviser yet. Planning on it as we get past our 2019 tax season.
    We were always provided statements for each withdrawal and it showed part of the money as being "contribution" and the other as being "earnings". It was clearly spelled out on each statement.

    Call your 529 people to verify they do the same.
     

    MomToOne

    DIS Veteran
    Joined
    Mar 18, 2010
    Lots of great advice here, it is appreciated.

    One thing I have thought of through these discussions.......are the "earnings" of the 529 withdrawn differently from the rest? First in, first out? How is it determined if you are using the earnings versus what you put in of your own, post-taxed funds? I'd prefer to use his earnings on expenses we do have and leave the principal of what we contributed in place. My reasoning is I'd have a smaller earnings residual at the end. Does this sound reasonable for those who have done this?

    No, I have not reached out to a financial adviser yet. Planning on it as we get past our 2019 tax season.
    It could vary by plan how they figure the earnings vs. contribution portions of the distribution but mine (Utah) assigns what looks to be a prorated value to each amount on a withdrawal. I cannot specify that I am withdrawing all contributions and no earnings or anything like that.

    Side note: After all the years of hearing "save for college using a 529" I was a bit overwhelmed at first dealing with all the details of getting the money OUT without screwing it up and getting hit with taxes, penalties or just general nasty-grams from the IRS. And I am VERY confident with finances and investments!! Unfortunately it's not as easy as "here's a college expense, let me take it out of the 529". Take some time to read up on qualified vs. non-qualified expenses, and the timing that is expected for withdrawals (even though it's not spelled out in the IRS info, you have to withdraw in the same calendar year as the expense is paid). Also check out your son's college website (usually the bursar's office) - while tuition is qualified, not all fees are. They should have info somewhere on the website on what fees are considered qualified vs. not; don't try and figure it out yourself - you'll get it wrong. Read up on 1099-Ts and 1099-Qs, and which ones might apply to your taxes vs. your sons. Since it sounds like your son is getting a bucket of money for general expenses, also read up on what portion of that might be taxable. Google is your friend right now. And don't forget to put together a plan for detailed record keeping so you can justify your 529 withdrawals to the IRS if necessary - your son's participation is going to be needed here, make sure he understands the importance of keeping receipts, etc.
     
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    BridgetBordeaux

    DIS Veteran
    Joined
    Jun 27, 2008
    It could vary by plan how they figure the earnings vs. contribution portions of the distribution but mine (Utah) assigns what looks to be a prorated value to each amount on a withdrawal. I cannot specify that I am withdrawing all contributions and no earnings or anything like that.

    Side note: After all the years of hearing "save for college using a 529" I was a bit overwhelmed at first dealing with all the details of getting the money OUT without screwing it up and getting hit with taxes, penalties or just general nasty-grams from the IRS. And I am VERY confident with finances and investments!! Unfortunately it's not as easy as "here's a college expense, let me take it out of the 529". Take some time to read up on qualified vs. non-qualified expenses, and the timing that is expected for withdrawals (even though it's not spelled out in the IRS info, you have to withdraw in the same calendar year as the expense is paid). Also check out your son's college website (usually the bursar's office) - while tuition is qualified, not all fees are. They should have info somewhere on the website on what fees are considered qualified vs. not; don't try and figure it out yourself - you'll get it wrong. Read up on 1099-Ts and 1099-Qs, and which ones might apply to your taxes vs. your sons. Since it sounds like your son is getting a bucket of money for general expenses, also read up on what portion of that might be taxable. Google is your friend right now. And don't forget to put together a plan for detailed record keeping so you can justify your 529 withdrawals to the IRS if necessary - your son's participation is going to be needed here, make sure he understands the importance of keeping receipts, etc.
    Yep...........we messed up in the following way:
    I paid the January tuition bill in late December and did not get around to doing a withdrawal until early January. That caused my calendar year tuition paid number mismatch the calendar year withdrawal and the IRS noted it and sent me a tax bill. Legally I owed it..............but I did not make that mistake again.
     


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