1st withdrawal from 529

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Topic Author
miamivice
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1st withdrawal from 529

Post by miamivice »

I'm thinking about making my first withdrawal from my 529 account.

Two questions:

1) Do I simply withdraw the money? The student will officially enroll on August 22nd but we "need" to purchase the student a computer prior to then. Do I just buy the computer, withdraw the money to reimburse myself, and then wait for the IRS to ask for supporting paperwork?

2) Is there any limits to the amount one can spend on a computer? I am thinking about dropping $3500 on a nice system for the student. He deserves the best after all. Will that catch IRS attention, and would it be better to cash flow a portion? I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
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SmileyFace
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Re: 1st withdrawal from 529

Post by SmileyFace »

miamivice wrote: Mon Jun 27, 2022 6:50 pm I'm thinking about making my first withdrawal from my 529 account.

Two questions:

1) Do I simply withdraw the money? The student will officially enroll on August 22nd but we "need" to purchase the student a computer prior to then. Do I just buy the computer, withdraw the money to reimburse myself, and then wait for the IRS to ask for supporting paperwork?

2) Is there any limits to the amount one can spend on a computer? I am thinking about dropping $3500 on a nice system for the student. He deserves the best after all. Will that catch IRS attention, and would it be better to cash flow a portion? I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
You should save the paperwork but only need it if audited. No specifics on how much you are allowed to spend that I am aware of - I bought a $3,000 system without concern.
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miamivice
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Re: 1st withdrawal from 529

Post by miamivice »

SmileyFace wrote: Mon Jun 27, 2022 7:12 pm
miamivice wrote: Mon Jun 27, 2022 6:50 pm I'm thinking about making my first withdrawal from my 529 account.

Two questions:

1) Do I simply withdraw the money? The student will officially enroll on August 22nd but we "need" to purchase the student a computer prior to then. Do I just buy the computer, withdraw the money to reimburse myself, and then wait for the IRS to ask for supporting paperwork?

2) Is there any limits to the amount one can spend on a computer? I am thinking about dropping $3500 on a nice system for the student. He deserves the best after all. Will that catch IRS attention, and would it be better to cash flow a portion? I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
You should save the paperwork but only need it if audited. No specifics on how much you are allowed to spend that I am aware of - I bought a $3,000 system without concern.
OK. The student has scholarships to pay for the college education, around $80k this year, that will all be turned into the IRS for tax purposes. So there is no doubt that the student is actually in college. I would be surprised if we get audited.

Thanks for the information.
regionrat
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Re: 1st withdrawal from 529

Post by regionrat »

We’ll be making first withdrawal this year as well. First semester tuition, room and board is due July 31. I plan to cash flow the initial payment plus other qualified costs and make 2022 withdrawal near the end of the year. Will take similar approach to second semester to ensure 2023 costs come out in 2023.
Topic Author
miamivice
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Re: 1st withdrawal from 529

Post by miamivice »

regionrat wrote: Mon Jun 27, 2022 7:23 pm We’ll be making first withdrawal this year as well. First semester tuition, room and board is due July 31. I plan to cash flow the initial payment plus other qualified costs and make 2022 withdrawal near the end of the year. Will take similar approach to second semester to ensure 2023 costs come out in 2023.
I'm assuming that taking the money out at the end of 2022 is a matter of personal preference rather than IRS requirement?
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squirrel1963
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Re: 1st withdrawal from 529

Post by squirrel1963 »

miamivice wrote: Mon Jun 27, 2022 6:50 pm 1) Do I simply withdraw the money? The student will officially enroll on August 22nd but we "need" to purchase the student a computer prior to then. Do I just buy the computer, withdraw the money to reimburse myself, and then wait for the IRS to ask for supporting paperwork?
You can do it anyway you wish. I always paid out of pocket first and then did account withdrawals, including for tuition and room&board. I usually made withdrawals to match expenses in June and in December. Either way, just save all the receipts so you can back up your claims to the IRS.
EDIT: just make sure to make withdrawals in the same calendar year of the expenses.
miamivice wrote: Mon Jun 27, 2022 6:50 pm 2) Is there any limits to the amount one can spend on a computer? I am thinking about dropping $3500 on a nice system for the student. He deserves the best after all. Will that catch IRS attention, and would it be better to cash flow a portion? I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).
There are no limitations as far as I know, and $3500 is a relatively small amount compared what tuition and room&board can be.
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Golfalot
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Re: 1st withdrawal from 529

Post by Golfalot »

My daughter finished her freshmen year in college this past May. So have a little experience with this.

For tuition, room & board, laptop, books, etc.., I just simply withdrew the money from the 529 and reimbursed myself. I saved electronic copies of the receipts & created an Excel spreadsheet that tracks all the various expenses/receipts with the different withdrawals that I made. I doubt we will ever be audited, but it is good to have it all nicely organized just in case.

I am not aware of any limit to the $$ value of a laptop. I think we spent about $2k on a nice Apple Macbook Pro.

Not sure if you do your taxes in TurboTax, but I do remember it being a little squirrelly getting the 1099-Q and 1098-T forms entered into TurboTax appropriately so that none of the 529 withdrawal amounts were taxable. A simple google search helped me find some nice tips to get that done properly as the TurboTax wizard/guide did not work properly for me initially.
regionrat
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Re: 1st withdrawal from 529

Post by regionrat »

Because a college year spans two different tax years, I do the two withdrawal approach to keep my books as clean as possible. Fall semester 2022 costs reimbursed to myself with a late 2022 withdrawal. Spring 2023 costs reimbursed to myself with a May or June withdrawal. I don’t know that it’s a requirement. It just helps me keep things organized for my own records.
Pdxnative
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Re: 1st withdrawal from 529

Post by Pdxnative »

miamivice wrote: Mon Jun 27, 2022 6:50 pm I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
This wasn’t your question, but am I understanding correctly that you’re thinking about a desktop? FYI—All the college students I know have laptops.
invest4
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Re: 1st withdrawal from 529

Post by invest4 »

Pdxnative wrote: Wed Jun 29, 2022 11:57 pm
miamivice wrote: Mon Jun 27, 2022 6:50 pm I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
This wasn’t your question, but am I understanding correctly that you’re thinking about a desktop? FYI—All the college students I know have laptops.
...but the gaming is not as good on the laptop! :wink:
marcopolo
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Re: 1st withdrawal from 529

Post by marcopolo »

Golfalot wrote: Mon Jun 27, 2022 8:16 pm My daughter finished her freshmen year in college this past May. So have a little experience with this.

For tuition, room & board, laptop, books, etc.., I just simply withdrew the money from the 529 and reimbursed myself. I saved electronic copies of the receipts & created an Excel spreadsheet that tracks all the various expenses/receipts with the different withdrawals that I made. I doubt we will ever be audited, but it is good to have it all nicely organized just in case.

I am not aware of any limit to the $$ value of a laptop. I think we spent about $2k on a nice Apple Macbook Pro.

Not sure if you do your taxes in TurboTax, but I do remember it being a little squirrelly getting the 1099-Q and 1098-T forms entered into TurboTax appropriately so that none of the 529 withdrawal amounts were taxable. A simple google search helped me find some nice tips to get that done properly as the TurboTax wizard/guide did not work properly for me initially.
If you are using the 529 withdrawals for qualified education expenses, there is no reason to enter the 1099-Q and 1098-T information into your tax software.
Once in a while you get shown the light, in the strangest of places if you look at it right.
GuyInFL
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Re: 1st withdrawal from 529

Post by GuyInFL »

miamivice wrote: Mon Jun 27, 2022 7:16 pm OK. The student has scholarships to pay for the college education, around $80k this year, that will all be turned into the IRS for tax purposes. So there is no doubt that the student is actually in college. I would be surprised if we get audited.

Thanks for the information.
Congrats on the scholarship!
Here's a good discussion on claiming education tax credits, 529s, and scholarshios.
https://ttlc.intuit.com/community/colle ... 00/2521900
theplayer11
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Re: 1st withdrawal from 529

Post by theplayer11 »

Pdxnative wrote: Wed Jun 29, 2022 11:57 pm
miamivice wrote: Mon Jun 27, 2022 6:50 pm I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
This wasn’t your question, but am I understanding correctly that you’re thinking about a desktop? FYI—All the college students I know have laptops.
not sure if standard, but my D had courses that required a laptop for online tests in classroom
Last edited by theplayer11 on Thu Jun 30, 2022 6:29 am, edited 1 time in total.
Samueul
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Re: 1st withdrawal from 529

Post by Samueul »

This is my 1st year withdrawing from 529 too. Question, my daughter received a $1000.00 scholarship, does the 529 withdrawal have to be less that $1000 to be a qualified withdrawal or can we withdrawal the total amount of the tuition?

Example:
Tuition = $6000
Scholarship = $1000
529 Withdrawal = $5000

Thank you in advance.
neglogic
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Re: 1st withdrawal from 529

Post by neglogic »

Pdxnative wrote: Wed Jun 29, 2022 11:57 pm
miamivice wrote: Mon Jun 27, 2022 6:50 pm I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
This wasn’t your question, but am I understanding correctly that you’re thinking about a desktop? FYI—All the college students I know have laptops.
I would echo that. A laptop is far more useful than a desktop for a college student, and $3500 for a desktop or a laptop is absurdly expensive and unnecessary.
Outer Marker
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Re: 1st withdrawal from 529

Post by Outer Marker »

Anyone know if it is possible to specify whether 529 withdrawals come from contributions or growth? Or must they be pro-rata?

It's my understand that you can take unqualified distributions from contributions without penalty, but must pay a 10% penalty plus regular income tax on the earnings.
deltaneutral83
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Re: 1st withdrawal from 529

Post by deltaneutral83 »

Samueul wrote: Thu Jun 30, 2022 6:20 am This is my 1st year withdrawing from 529 too. Question, my daughter received a $1000.00 scholarship, does the 529 withdrawal have to be less that $1000 to be a qualified withdrawal or can we withdrawal the total amount of the tuition?

Example:
Tuition = $6000
Scholarship = $1000
529 Withdrawal = $5000

Thank you in advance.
You get to withdraw the scholarship amount too, just keep records of it.

On the contribution side, if mom and dad have a joint checking account, can they fund $32k per 529 without issue ?
shess
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Re: 1st withdrawal from 529

Post by shess »

I would concur on the laptop vs desktop question. A laptop is unquestionably useful for college. I am a software engineer and have always had beefy home systems, and I would feel uncomfortable trying to justify a full desktop as an educational expense. It just wouldn’t be useful these days.

Additionally, I would want to see the living situation before throwing in a desktop machine. My kid has had a couple years where cramming in a real desktop would have required some decent Tetris skills, plus good interpersonal skills to manage roommates who just want to get some sleep.
marcopolo
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Re: 1st withdrawal from 529

Post by marcopolo »

Outer Marker wrote: Thu Jun 30, 2022 7:26 am Anyone know if it is possible to specify whether 529 withdrawals come from contributions or growth? Or must they be pro-rata?

It's my understand that you can take unqualified distributions from contributions without penalty, but must pay a 10% penalty plus regular income tax on the earnings.
It has to be pro-rata
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
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Re: 1st withdrawal from 529

Post by marcopolo »

deltaneutral83 wrote: Thu Jun 30, 2022 10:19 am
Samueul wrote: Thu Jun 30, 2022 6:20 am This is my 1st year withdrawing from 529 too. Question, my daughter received a $1000.00 scholarship, does the 529 withdrawal have to be less that $1000 to be a qualified withdrawal or can we withdrawal the total amount of the tuition?

Example:
Tuition = $6000
Scholarship = $1000
529 Withdrawal = $5000

Thank you in advance.
You get to withdraw the scholarship amount too, just keep records of it.

On the contribution side, if mom and dad have a joint checking account, can they fund $32k per 529 without issue ?
You can withdraw the scholarship amount, but you will pay taxes on the gains associated with that portion of the withdrawal, but no 10% penalty.

So, in the example above if we assume the 529 was well invested, and has a value double of what was contributed, then we have.

Tuition 6000
scholarship 1000
529 withdrawal 6000
529 basis of withdraw 3000

$5000 of the withdrawal is tax free.
$1000 becomes a taxable withdrawal
Since 1/2 is return of capital, this adds $500 to taxable income.

The taxable income gets added to whoever's taxes that received the withdrawal. It can be advantageous to have withdrawal sent to student in this scenario and have them pay the bills, as they are likely to be in lower bracket. We always did that in case our calculations were off and some portion of withdrawals became taxable.

on the contribution side you are allowed to bunch up to 5 years of contributions together, so each person could contribute $80k, for a total of $160k in a year without any gift tax filing requirements.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Pdxnative
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Re: 1st withdrawal from 529

Post by Pdxnative »

deltaneutral83 wrote: Thu Jun 30, 2022 10:19 am
Samueul wrote: Thu Jun 30, 2022 6:20 am This is my 1st year withdrawing from 529 too. Question, my daughter received a $1000.00 scholarship, does the 529 withdrawal have to be less that $1000 to be a qualified withdrawal or can we withdrawal the total amount of the tuition?

Example:
Tuition = $6000
Scholarship = $1000
529 Withdrawal = $5000

Thank you in advance.
You get to withdraw the scholarship amount too, just keep records of it.

On the contribution side, if mom and dad have a joint checking account, can they fund $32k per 529 without issue ?
I believe taxes would be owed on the earnings portion of the 1k, but no 10% penalty. (Unless there are other expenses to which the scholarship or 529 withdrawal could be allocated).
Topic Author
miamivice
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Re: 1st withdrawal from 529

Post by miamivice »

neglogic wrote: Thu Jun 30, 2022 6:33 am
Pdxnative wrote: Wed Jun 29, 2022 11:57 pm
miamivice wrote: Mon Jun 27, 2022 6:50 pm I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
This wasn’t your question, but am I understanding correctly that you’re thinking about a desktop? FYI—All the college students I know have laptops.
I would echo that. A laptop is far more useful than a desktop for a college student, and $3500 for a desktop or a laptop is absurdly expensive and unnecessary.
The student prefers to purchase a new desktop. $3500 is absurdly expensive and unnecessary - I am wondering if the IRS will care? It is a nice computer system for the student.
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miamivice
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Re: 1st withdrawal from 529

Post by miamivice »

shess wrote: Thu Jun 30, 2022 10:41 am I would concur on the laptop vs desktop question. A laptop is unquestionably useful for college. I am a software engineer and have always had beefy home systems, and I would feel uncomfortable trying to justify a full desktop as an educational expense. It just wouldn’t be useful these days.

Additionally, I would want to see the living situation before throwing in a desktop machine. My kid has had a couple years where cramming in a real desktop would have required some decent Tetris skills, plus good interpersonal skills to manage roommates who just want to get some sleep.
You guys are all thinking traditional college student, i.e., I'm the parent and sending my kid off to college. Nope, not traditional this time. I'm off to college myself this fall (evening classes) and decided that I need a new computer to use for my studies. I do my studies primary using my desktop computer. I do have a laptop for on the go stuff, but since my studies are online, I rarely use it.

The computer that I purchased (from Costco) is a Dell XPS 8950 with 64gb ram, 3tb total hard drive space, and a i7-12700 processor. I also purchased 3 monitors, 4K, 27" in size that will use, for a total of just over $3500.

I happen to have a 529 in my name. It's for the kids eventually but I haven't moved the money into the kids name yet. I set the money aside when they were in the womb and prior to having their own SSN, so I had to open it in my name instead of theirs. Eventually I will move it over. I think the 529 is a bit overstuffed at the moment so spending a little on myself is not a bad idea.

Thanks for the advice. I'm going to go for using 529 money this time around for at least a portion of the computer expenses. It doesn't sound we will get audited, and even if I do, I have a paper trail to support me being a student, in classes, and having a new computer that is being used for school.
Pdxnative
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Re: 1st withdrawal from 529

Post by Pdxnative »

miamivice wrote: Thu Jun 30, 2022 11:59 am
shess wrote: Thu Jun 30, 2022 10:41 am I would concur on the laptop vs desktop question. A laptop is unquestionably useful for college. I am a software engineer and have always had beefy home systems, and I would feel uncomfortable trying to justify a full desktop as an educational expense. It just wouldn’t be useful these days.

Additionally, I would want to see the living situation before throwing in a desktop machine. My kid has had a couple years where cramming in a real desktop would have required some decent Tetris skills, plus good interpersonal skills to manage roommates who just want to get some sleep.
You guys are all thinking traditional college student, i.e., I'm the parent and sending my kid off to college. Nope, not traditional this time. I'm off to college myself this fall (evening classes) and decided that I need a new computer to use for my studies. I do my studies primary using my desktop computer. I do have a laptop for on the go stuff, but since my studies are online, I rarely use it.

The computer that I purchased (from Costco) is a Dell XPS 8950 with 64gb ram, 3tb total hard drive space, and a i7-12700 processor. I also purchased 3 monitors, 4K, 27" in size that will use, for a total of just over $3500.

I happen to have a 529 in my name. It's for the kids eventually but I haven't moved the money into the kids name yet. I set the money aside when they were in the womb and prior to having their own SSN, so I had to open it in my name instead of theirs. Eventually I will move it over. I think the 529 is a bit overstuffed at the moment so spending a little on myself is not a bad idea.

Thanks for the advice. I'm going to go for using 529 money this time around for at least a portion of the computer expenses. It doesn't sound we will get audited, and even if I do, I have a paper trail to support me being a student, in classes, and having a new computer that is being used for school.
Understood, makes sense now.

I wouldn’t think twice about using 529 funds for the total cost. You’d just need to justify that the computer is used primarily for your college studies; and then only if audited which is highly unlikely to happen over something like this.
markcoop
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Re: 1st withdrawal from 529

Post by markcoop »

marcopolo wrote: Thu Jun 30, 2022 3:38 am
Golfalot wrote: Mon Jun 27, 2022 8:16 pm My daughter finished her freshmen year in college this past May. So have a little experience with this.

For tuition, room & board, laptop, books, etc.., I just simply withdrew the money from the 529 and reimbursed myself. I saved electronic copies of the receipts & created an Excel spreadsheet that tracks all the various expenses/receipts with the different withdrawals that I made. I doubt we will ever be audited, but it is good to have it all nicely organized just in case.

I am not aware of any limit to the $$ value of a laptop. I think we spent about $2k on a nice Apple Macbook Pro.

Not sure if you do your taxes in TurboTax, but I do remember it being a little squirrelly getting the 1099-Q and 1098-T forms entered into TurboTax appropriately so that none of the 529 withdrawal amounts were taxable. A simple google search helped me find some nice tips to get that done properly as the TurboTax wizard/guide did not work properly for me initially.
If you are using the 529 withdrawals for qualified education expenses, there is no reason to enter the 1099-Q and 1098-T information into your tax software.
Although this is true, I suspect that most people do enter it. I know I do to have a record of it, to make sure my calculations were correct to claim education credits, etc.

My tip is to jot down what the tax software says you owe in taxes before entering that section and make sure it doesn't change when you leave that section.
Last edited by markcoop on Thu Jun 30, 2022 2:58 pm, edited 4 times in total.
Mark
Pdxnative
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Re: 1st withdrawal from 529

Post by Pdxnative »

Revising my comment above. I had incorrectly remembered “used primarily for school” as a key criterion but the actual language used in pub 970 is less restrictive:

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't in- clude expenses for computer software for sports, games, or hobbies unless the software is predomi- nantly educational in nature.)
Topic Author
miamivice
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Re: 1st withdrawal from 529

Post by miamivice »

Pdxnative wrote: Thu Jun 30, 2022 12:12 pm Revising my comment above. I had incorrectly remembered “used primarily for school” as a key criterion but the actual language used in pub 970 is less restrictive:

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't in- clude expenses for computer software for sports, games, or hobbies unless the software is predomi- nantly educational in nature.)
Thanks for the correction. When I read your earlier post, I was thinking that the "used primarily for school" was a made-up rule, and then you clarified to what the actual rule is. Yes, the computer will be used ONLY by me! :D :D
shess
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Re: 1st withdrawal from 529

Post by shess »

marcopolo wrote: Thu Jun 30, 2022 11:28 am
Outer Marker wrote: Thu Jun 30, 2022 7:26 am Anyone know if it is possible to specify whether 529 withdrawals come from contributions or growth? Or must they be pro-rata?

It's my understand that you can take unqualified distributions from contributions without penalty, but must pay a 10% penalty plus regular income tax on the earnings.
It has to be pro-rata
You can find threads elsewhere about using 2 529 plans if you're worried about overfunding, one in equities, one in fixed-income. Then if/when you start using them, you can draw first from the equity plan (higher earnings-to-basis ratio), while leaving the fixed-income plan for last. If you end up with "too much", the fixed-income plan will have lower earnings for taxes and 10% penalties.

Unfortunately, this is the kind of thing that's only really useful if you're doing it a decade or more in advance :-).
Samueul
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Re: 1st withdrawal from 529

Post by Samueul »

marcopolo wrote: Thu Jun 30, 2022 11:37 am
deltaneutral83 wrote: Thu Jun 30, 2022 10:19 am
Samueul wrote: Thu Jun 30, 2022 6:20 am This is my 1st year withdrawing from 529 too. Question, my daughter received a $1000.00 scholarship, does the 529 withdrawal have to be less that $1000 to be a qualified withdrawal or can we withdrawal the total amount of the tuition?

Example:
Tuition = $6000
Scholarship = $1000
529 Withdrawal = $5000

Thank you in advance.
You get to withdraw the scholarship amount too, just keep records of it.

On the contribution side, if mom and dad have a joint checking account, can they fund $32k per 529 without issue ?
You can withdraw the scholarship amount, but you will pay taxes on the gains associated with that portion of the withdrawal, but no 10% penalty.

So, in the example above if we assume the 529 was well invested, and has a value double of what was contributed, then we have.

Tuition 6000
scholarship 1000
529 withdrawal 6000
529 basis of withdraw 3000

$5000 of the withdrawal is tax free.
$1000 becomes a taxable withdrawal
Since 1/2 is return of capital, this adds $500 to taxable income.

The taxable income gets added to whoever's taxes that received the withdrawal. It can be advantageous to have withdrawal sent to student in this scenario and have them pay the bills, as they are likely to be in lower bracket. We always did that in case our calculations were off and some portion of withdrawals became taxable.

on the contribution side you are allowed to bunch up to 5 years of contributions together, so each person could contribute $80k, for a total of $160k in a year without any gift tax filing requirements.
Thank you for the explanation.
SimonJester
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Re: 1st withdrawal from 529

Post by SimonJester »

Also do not over look the AOTC, if you qualify (income limits) you can get a direct tax credit of $2,500 per year. You need spend $4,000 in funds that are not from the 529 on tuition and books (room & board doesn't count).

https://www.irs.gov/credits-deductions/individuals/aotc

I planned this into my college funds for my kids for 4 years each...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin
lstone19
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Re: 1st withdrawal from 529

Post by lstone19 »

miamivice wrote: Thu Jun 30, 2022 11:50 am The student prefers to purchase a new desktop. $3500 is absurdly expensive and unnecessary - I am wondering if the IRS will care? It is a nice computer system for the student.
The IRS will only care if they audit you which is unlikely. A few of your earlier posts imply you think you need to file something with the IRS justifying how you spent the 529 money. No, you do not do that. Unless you qualify for one the education credits, if all your 529 distributions were spent on qualified expenses, nothing goes on your tax return. This causes no end of problems for people who think because they received a 1099-Q and/or a 1098-T, they must put somewhere on their tax return,

FWIW, when my son was in college, we did not qualify for any of the credits but thanks to a scholarship, had excess in the 529 so tax on the gains but no penalties. Filing that situation is sort of on the honor system. TT showed the taxable gain as Other Income with the note "Qual State Tuition Program from 1099-Q." The same amount was on Form 5329 Part II where the 10% additional tax is calculated if applicable (it wasn't - the entire amount was listed as not subject to that tax). And that was it even though the Other Income amount was only a percentage of the gains listed on the 1099-Q and an even smaller percentage of the total distribution. Unless needed for other purposes, qualified distributions from a 529 are not reported on your 1040 nor anywhere else.
Katietsu
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Re: 1st withdrawal from 529

Post by Katietsu »

SimonJester wrote: Fri Jul 01, 2022 3:15 pm Also do not over look the AOTC, if you qualify (income limits) you can get a direct tax credit of $2,500 per year. You need spend $4,000 in funds that are not from the 529 on tuition and books (room & board doesn't count).

https://www.irs.gov/credits-deductions/individuals/aotc

I planned this into my college funds for my kids for 4 years each...
This is how most handle it and is a good reminder. However, if a student has 529 funds and scholarships that are going to cover all their anticipated expenses, there is an alternative. You use 529 money for tuition and use it to claim AOTC. You do need to include the pro rata earnings of $4000 as income on either the student or parent return. On a recent return, for instance, the income taxes on the 529 withdrawal was $400 vs the $2500 credit. Note that unqualified 529 withdrawals are subject to the kiddie tax. There are also similar maneuvers involving scholarships. If you get good at that try optimizing with all the education credits, 529, scholarships and cash possibilities all at once!
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orcycle
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Re: 1st withdrawal from 529

Post by orcycle »

SimonJester wrote: Fri Jul 01, 2022 3:15 pm Also do not over look the AOTC, if you qualify (income limits) you can get a direct tax credit of $2,500 per year. You need spend $4,000 in funds that are not from the 529 on tuition and books (room & board doesn't count).

https://www.irs.gov/credits-deductions/individuals/aotc

I planned this into my college funds for my kids for 4 years each...
Does timing of payments matter on this if funds coming from 529 exceed the amount of tuition? For example, let’s say all costs for fall semester are $25,000, which is a mix of tuition ($20,000) and room and board ($5,000). Does the $4,000 have to be paid first to count entirely toward tuition before the $21,000 payment? I can’t imagine the IRS would scrutinize this closely but thought I would ask.
Pdxnative
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Re: 1st withdrawal from 529

Post by Pdxnative »

orcycle wrote: Fri Jul 01, 2022 7:09 pm
SimonJester wrote: Fri Jul 01, 2022 3:15 pm Also do not over look the AOTC, if you qualify (income limits) you can get a direct tax credit of $2,500 per year. You need spend $4,000 in funds that are not from the 529 on tuition and books (room & board doesn't count).

https://www.irs.gov/credits-deductions/individuals/aotc

I planned this into my college funds for my kids for 4 years each...
Does timing of payments matter on this if funds coming from 529 exceed the amount of tuition? For example, let’s say all costs for fall semester are $25,000, which is a mix of tuition ($20,000) and room and board ($5,000). Does the $4,000 have to be paid first to count entirely toward tuition before the $21,000 payment? I can’t imagine the IRS would scrutinize this closely but thought I would ask.
The money is pretty much fungible and you can designate which funds went toward tuition when you file your tax form. This is what the poster above was referencing. See pub 970 on coordinating aotc and QTP:


https://www.irs.gov/publications/p970
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orcycle
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Re: 1st withdrawal from 529

Post by orcycle »

Pdxnative wrote: Fri Jul 01, 2022 7:49 pm
orcycle wrote: Fri Jul 01, 2022 7:09 pm
SimonJester wrote: Fri Jul 01, 2022 3:15 pm Also do not over look the AOTC, if you qualify (income limits) you can get a direct tax credit of $2,500 per year. You need spend $4,000 in funds that are not from the 529 on tuition and books (room & board doesn't count).

https://www.irs.gov/credits-deductions/individuals/aotc

I planned this into my college funds for my kids for 4 years each...
Does timing of payments matter on this if funds coming from 529 exceed the amount of tuition? For example, let’s say all costs for fall semester are $25,000, which is a mix of tuition ($20,000) and room and board ($5,000). Does the $4,000 have to be paid first to count entirely toward tuition before the $21,000 payment? I can’t imagine the IRS would scrutinize this closely but thought I would ask.
The money is pretty much fungible and you can designate which funds went toward tuition when you file your tax form. This is what the poster above was referencing. See pub 970 on coordinating aotc and QTP:


https://www.irs.gov/publications/p970
Thanks, I will read that publication again, I want to be sure I'm doing this right as I will be doing it for three kids (!). News to me was the ability to treat 529 contributions as AOTC, and just paying the income tax on that portion's gain, making me wonder if I should amend a tax return. Also, sorry to hijack the thread.
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Re: 1st withdrawal from 529

Post by Katietsu »

orcycle wrote: Fri Jul 01, 2022 9:27 pm
Pdxnative wrote: Fri Jul 01, 2022 7:49 pm
orcycle wrote: Fri Jul 01, 2022 7:09 pm
SimonJester wrote: Fri Jul 01, 2022 3:15 pm Also do not over look the AOTC, if you qualify (income limits) you can get a direct tax credit of $2,500 per year. You need spend $4,000 in funds that are not from the 529 on tuition and books (room & board doesn't count).

https://www.irs.gov/credits-deductions/individuals/aotc

I planned this into my college funds for my kids for 4 years each...
Does timing of payments matter on this if funds coming from 529 exceed the amount of tuition? For example, let’s say all costs for fall semester are $25,000, which is a mix of tuition ($20,000) and room and board ($5,000). Does the $4,000 have to be paid first to count entirely toward tuition before the $21,000 payment? I can’t imagine the IRS would scrutinize this closely but thought I would ask.
The money is pretty much fungible and you can designate which funds went toward tuition when you file your tax form. This is what the poster above was referencing. See pub 970 on coordinating aotc and QTP:


https://www.irs.gov/publications/p970
Thanks, I will read that publication again, I want to be sure I'm doing this right as I will be doing it for three kids (!). News to me was the ability to treat 529 contributions as AOTC, and just paying the income tax on that portion's gain, making me wonder if I should amend a tax return. Also, sorry to hijack the thread.
I just did a 2018 amendment for an extended family member. In their case, it was definitely worth it. But the benefit varies as the % that are earnings, the tax rate and whether or not state taxes are impacted will all influence the net. You also need to remember that AOTC is only available for 4 years and most students are in school for 5 calendar years. So if you can miss the freshman year and still get all the AOTC. The lifetime learning credit is available for the 5th year. It is not as generous of a credit and less people see a strong benefit from using 529 funds while claiming the LLC.

Also remember that by have the 529 pay the school directly or issue the check in the student’s name, the taxation of the earnings when applicable ends up on the student’s return even though the credit may be on the parent’s return. This can work out well if student has minimal income.
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Vulcan
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Re: 1st withdrawal from 529

Post by Vulcan »

miamivice wrote: Mon Jun 27, 2022 7:16 pm OK. The student has scholarships to pay for the college education, around $80k this year, that will all be turned into the IRS for tax purposes.
miamivice wrote: You guys are all thinking traditional college student, i.e., I'm the parent and sending my kid off to college. Nope, not traditional this time. I'm off to college myself this fall (evening classes)
Wow. How does a non-traditional student field a scholarship like that - and why are evening classes so expensive?
If you torture the data long enough, it will confess to anything. ~Ronald Coase
GuyInFL
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Re: 1st withdrawal from 529

Post by GuyInFL »

Pdxnative wrote: Thu Jun 30, 2022 11:44 am
deltaneutral83 wrote: Thu Jun 30, 2022 10:19 am
Samueul wrote: Thu Jun 30, 2022 6:20 am This is my 1st year withdrawing from 529 too. Question, my daughter received a $1000.00 scholarship, does the 529 withdrawal have to be less that $1000 to be a qualified withdrawal or can we withdrawal the total amount of the tuition?

Example:
Tuition = $6000
Scholarship = $1000
529 Withdrawal = $5000

Thank you in advance.
You get to withdraw the scholarship amount too, just keep records of it.

On the contribution side, if mom and dad have a joint checking account, can they fund $32k per 529 without issue ?
I believe taxes would be owed on the earnings portion of the 1k, but no 10% penalty. (Unless there are other expenses to which the scholarship or 529 withdrawal could be allocated).
Don't forget Room and Board. That will exceed $1K so the whole withdrawal will be tax free.
Also read the comments above about AOTC. Definitely claim that, but it could make some of the scholarship taxable to your kid.
AlwaysLearningMore
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Re: 1st withdrawal from 529

Post by AlwaysLearningMore »

We asked VG for advice when we began withdrawing for higher ed costs, and were told 'just keep good records,' nothing more specific. So the 529's check is sent directly to the univ. with student ID number on the check. Screenshots of all ALL transactions saved.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
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HMSVictory
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Re: 1st withdrawal from 529

Post by HMSVictory »

Golfalot wrote: Mon Jun 27, 2022 8:16 pm I am not aware of any limit to the $$ value of a laptop. I think we spent about $2k on a nice Apple Macbook Pro.
Nice choice. I used to only buy the MacBook Pros but now with the power of the M1 and M2 chips I really like the Air for portability and size.
Stay the course!
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HMSVictory
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Re: 1st withdrawal from 529

Post by HMSVictory »

miamivice wrote: Thu Jun 30, 2022 11:50 am
neglogic wrote: Thu Jun 30, 2022 6:33 am
Pdxnative wrote: Wed Jun 29, 2022 11:57 pm
miamivice wrote: Mon Jun 27, 2022 6:50 pm I might use the 529 for the tower ($2000) and cashflow the monitors ($1300).

Thanks!
This wasn’t your question, but am I understanding correctly that you’re thinking about a desktop? FYI—All the college students I know have laptops.
I would echo that. A laptop is far more useful than a desktop for a college student, and $3500 for a desktop or a laptop is absurdly expensive and unnecessary.
The student prefers to purchase a new desktop. $3500 is absurdly expensive and unnecessary - I am wondering if the IRS will care? It is a nice computer system for the student.
You can easily spend $3-4k on a nice MacBook Pro which will have the computing power for video editing, 3D design, coding or whatever is needed.

I'd get a laptop and a monitor for the dorm room if you want to dock it.

That computer will last a long time and still be in use after college.
Stay the course!
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miamivice
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Re: 1st withdrawal from 529

Post by miamivice »

Vulcan wrote: Fri Jul 01, 2022 10:19 pm
miamivice wrote: Mon Jun 27, 2022 7:16 pm OK. The student has scholarships to pay for the college education, around $80k this year, that will all be turned into the IRS for tax purposes.
miamivice wrote: You guys are all thinking traditional college student, i.e., I'm the parent and sending my kid off to college. Nope, not traditional this time. I'm off to college myself this fall (evening classes)
Wow. How does a non-traditional student field a scholarship like that - and why are evening classes so expensive?
The scholarship is provided by the student's employer through the continuing education department of his employer. Evening classes are simply expensive.
marcopolo
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Re: 1st withdrawal from 529

Post by marcopolo »

miamivice wrote: Sun Jul 03, 2022 11:57 am
Vulcan wrote: Fri Jul 01, 2022 10:19 pm
miamivice wrote: Mon Jun 27, 2022 7:16 pm OK. The student has scholarships to pay for the college education, around $80k this year, that will all be turned into the IRS for tax purposes.
miamivice wrote: You guys are all thinking traditional college student, i.e., I'm the parent and sending my kid off to college. Nope, not traditional this time. I'm off to college myself this fall (evening classes)
Wow. How does a non-traditional student field a scholarship like that - and why are evening classes so expensive?
The scholarship is provided by the student's employer through the continuing education department of his employer. Evening classes are simply expensive.
That is a mighty generous education benefit!

Is it truly a scholarship? Or is it a tuition reimbursement benefit? I think the tax rules are quite different for the two.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Vulcan
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Re: 1st withdrawal from 529

Post by Vulcan »

marcopolo wrote: Sun Jul 03, 2022 12:20 pm
miamivice wrote: Sun Jul 03, 2022 11:57 am
Vulcan wrote: Fri Jul 01, 2022 10:19 pm
miamivice wrote: Mon Jun 27, 2022 7:16 pm OK. The student has scholarships to pay for the college education, around $80k this year, that will all be turned into the IRS for tax purposes.
miamivice wrote: You guys are all thinking traditional college student, i.e., I'm the parent and sending my kid off to college. Nope, not traditional this time. I'm off to college myself this fall (evening classes)
Wow. How does a non-traditional student field a scholarship like that - and why are evening classes so expensive?
The scholarship is provided by the student's employer through the continuing education department of his employer. Evening classes are simply expensive.
That is a mighty generous education benefit!

Is it truly a scholarship? Or is it a tuition reimbursement benefit? I think the tax rules are quite different for the two.
Almost certainly a tuition reimbursement benefit. I figured that may have been the case, but thought I'd ask.

I still can't imagine it being so expensive. Some of the most expensive private schools in the nation cost less with room and board included.

Someone must be overcharging, but if you're not the one paying, I guess it doesn't matter.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
talisman
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Re: 1st withdrawal from 529

Post by talisman »

How does the timing of expense and withdrawal work for the spring semester when it is billed in December? This will be my son's first year in college and his spring semester bill will be issued on December 10, 2022 and will be due by January 1, 2023. I obviously can't pay it on the New Year's Day holiday, so if I pay it in mid-December and also take the 529 withdrawal in mid-December is that okay? I'm a little confused by the mechanics of keeping the qualified expense and withdrawal in the same tax year. In other words, would the December invoice be considered a 2022 expense (because it was billed in 2022) even though the charges are for a semester in 2023?

Cheers!
DIFAR31
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Re: 1st withdrawal from 529

Post by DIFAR31 »

talisman wrote: Mon Jul 11, 2022 1:49 pm How does the timing of expense and withdrawal work for the spring semester when it is billed in December? This will be my son's first year in college and his spring semester bill will be issued on December 10, 2022 and will be due by January 1, 2023. I obviously can't pay it on the New Year's Day holiday, so if I pay it in mid-December and also take the 529 withdrawal in mid-December is that okay?
Yes.
I'm a little confused by the mechanics of keeping the qualified expense and withdrawal in the same tax year. In other words, would the December invoice be considered a 2022 expense (because it was billed in 2022) even though the charges are for a semester in 2023?

Cheers!
The expense date is based on when the payment is made, not when it was billed or when the services were actually rendered. Re: spring semester due dates of early January. If you want to pay in the same year that services are being rendered, ask the school if they will allow you to extend the due date by a week or so. Explain why you are asking. Most colleges will understand (they have heard it all), and at least in my experience the schools were very willing to accommodate. Paying for the traditional four academic years over the five tax years in which they run may allow you to max out education tax credits, if you are otherwise eligible.
secondcor521
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Re: 1st withdrawal from 529

Post by secondcor521 »

talisman wrote: Mon Jul 11, 2022 1:49 pm How does the timing of expense and withdrawal work for the spring semester when it is billed in December? This will be my son's first year in college and his spring semester bill will be issued on December 10, 2022 and will be due by January 1, 2023. I obviously can't pay it on the New Year's Day holiday, so if I pay it in mid-December and also take the 529 withdrawal in mid-December is that okay? I'm a little confused by the mechanics of keeping the qualified expense and withdrawal in the same tax year. In other words, would the December invoice be considered a 2022 expense (because it was billed in 2022) even though the charges are for a semester in 2023?
In terms of 529 distributions, there is no rule requiring distributions to be in the same year as expenses outlined in the relevant chapter (Chapter 7) of Pub 970 (https://www.irs.gov/pub/irs-pdf/p970.pdf). Go try to find it; I doubt you will. (If you can, please point it out to me so I can correct my erroneous ways!)

I've never worried about it. I pay the expense before it's due and reimburse myself from the 529 immediately after making the payment if it's a big one (like a semester tuition bill). If it's a bunch of small things I'll accumulate those for several months and then reimburse myself from the 529 in one larger lump sum. If I make taxable 529 distributions, those go on the tax return in the year of the distribution obviously.

Not that my experience means I'm correct, but I have done it this way across three kids and 20 college semesters and five tax years, with taxable scholarships, taxable 529 distributions, the AOTC, and Pell Grants, and have heard exactly zero peeps from the IRS.

Note that there *are* timing restrictions related to the tax credits (AOTC and LLC), and those timing restrictions should of course be respected and followed. There are other college-related tax benefits which also may have timing restrictions; I'm personally not familiar with those because we do not use them.
shess
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Re: 1st withdrawal from 529

Post by shess »

talisman wrote: Mon Jul 11, 2022 1:49 pm How does the timing of expense and withdrawal work for the spring semester when it is billed in December? This will be my son's first year in college and his spring semester bill will be issued on December 10, 2022 and will be due by January 1, 2023. I obviously can't pay it on the New Year's Day holiday, so if I pay it in mid-December and also take the 529 withdrawal in mid-December is that okay? I'm a little confused by the mechanics of keeping the qualified expense and withdrawal in the same tax year. In other words, would the December invoice be considered a 2022 expense (because it was billed in 2022) even though the charges are for a semester in 2023?
This concerned me in my son's first year. What happens is that the 1098-T his school sends includes the QTRE (qualified tuition and related expenses) for the items BILLED in that year, with box 7 checked. So for 2022, the 1098-T will include the fall 2022 QTRE and the spring 2023 QTRE. So I make the payments ASAP when I get the bill in December. They do ACH from our account, so I can generally do the ACH reimbursement from the 529 a day or two later. Unfortunately, for whatever reason they send out the bill on like December 17th, so I need to make sure I'm on the ball to not lose it in the winter travel rush, and make sure it's happening while their business office is still operating.

If you're really concerned, one option is to have the 529 plan make payments directly to the school. This is tough for books and laptops, but for the semester-sized bills it's more plausible. I'm thinking of trying that this year, since we have two kids in college.
ModifiedDuration
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Re: 1st withdrawal from 529

Post by ModifiedDuration »

I’m a CPA and have funded three kids college expenses through 529s.

I definitely made sure that the payment of expenses and reimbursements from 529 plans occurred in the same year.

Therefore, I would pay the bill that came in December and file for a reimbursement from the 529 plan immediately. It always worked out, but it was really something I didn’t want to have to worry about in the Holiday season.

Here is one write-up on the subject, which I would agree on:

“529 plan distributions must be made during the same tax year that the qualified expenses are incurred. This is not an official IRS rule, but it is implied by published IRS guidance. Tax professionals and other experts agree that 529 plan distributions should match up with qualified expenses.

This intended to prevent potential abuse where 529 plan account owners let their funds grow tax-deferred for an extended period of time before taking a distribution to pay for previous expenses. The longer funds are held in a 529 plan account, the greater the financial benefit.”

https://www.savingforcollege.com/articl ... d-expenses

Publication 970 does imply that the years have to match-up here:

“To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP [Qualified Tuition Program, also called 529 Plan] distributions for the tax year to the adjusted qualified education expenses.”
talisman
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Re: 1st withdrawal from 529

Post by talisman »

Thank you, everyone, for the advice! This is very helpful. I will just make the withdrawal in December the moment that I receive/pay the spring semester invoice. Is there any issue with paying the fall semester invoice now and waiting until later in the year to take the 529 withdrawal for reimbursement (as long as it is still done in the 2022 tax year)? I wouldn't mind giving the funds an opportunity to potentially compound for 5 more months, particularly given how much the markets have dropped this year.

Of course, there is also the interest-free monthly payment plan option that the university offers - but managing that starts to become a chore.

Thanks again!
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