November 21, 2014

What Is the Deadline for a 529 College Plan Distribution? ($ ?s)

Money Questions

Q: It’s getting near the end of the year, and I am wondering if I should withdraw money from my 529 plan. My son has been paying for his own expenses but never keeps receipts, so I don’t know how much I need to reimburse him.

Sincerely, Parenting Never Ends

$ ?s answered by Matthew Illian, CFP®

 

Dear Parenting Never Ends,

Asking the average male college student to track his expenses can be like asking a golden retriever not to shed. You are fighting against the natural disposition of this particular species. Adding to the complexity are unclear 529 distribution rules, but I recommend you make your best effort to distribute funds during the same calendar year that college expenses are incurred.

Reimbursement of 529 fund expenses can be taken out tax free when covering qualified higher education expenses (QHEEs). These QHEEs include:

  1. Tuition, fees, books, and supplies required for enrollment
  2. Computers and the cost of Internet access
  3. Special needs services
  4. Room and board

Some of our clients make distributions before they get ready to pay the upcoming bills, and others use their 529 accounts to reimburse themselves after the bills have been paid. The IRS has not issued a specific rule regarding the timing of reimbursements, but they have suggested they plan to patch this hole. On January 17, 2008, the IRS issued an Advance Notice for 529 plans indicating they are considering a rule requiring distributions and expenses to occur in the same calendar year or by March 31 of the following tax year. Although no final ruling has been made, you should consider this possible requirement when making decisions concerning distributions.

The safest method is to reimburse a conservative estimate of what you know was spent. You can always transfer unused 529 assets to a brother or sister in the family. A little bit of sibling rivalry may be all the motivation your son needs to make sure he finds those receipts and gets reimbursed for every penny.

 


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About Matthew Illian

Matthew Illian is on the Investment Committee at Marotta Wealth Management, Inc., specializing in small business consulting and retirement plans. He loves spending time outdoors, the less pavement the better, with his wife and three energetic boys. Favorite trails: Forest Hill Park

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