No in-person ceremonies, no parties…and the laptop as the new classroom. Anyone with students in the house knows only too well that COVID-19 has upended the academic normal for the foreseeable future.
If any of your children are in college, they were likely sent packing from their campus dorms to finish the semester at home. Part of the fallout may be a refund from the school for room and board and other expenses that you originally paid for with funds from a 529 college savings plan.
What’s the best way to handle that refund money? You’ve got options, including a recontribution to your 529, but they involve important timing. Refunds that are not recontributed or used for qualified expenses are considered non-qualified distributions and subject to federal and state taxes and penalties. It literally pays to take action soon.
You Can Recontribute Funds Used for Qualified Expenses
The Protecting Americans From Tax Hikes Act of 2015 (PATH Act) stipulates:
If the beneficiary or account owner of a 529 plan receives a refund of qualified higher education expenses from a college or university that were paid for with a 529 distribution, funds may be recontributed to a 529 plan.
Here’s a quick review of typical qualified 529 plan expenses:
- Room and board, if the student is enrolled at least half-time
- Computers, related equipment, internet access
- Special needs equipment
- Student loan payments (with limits)
- Apprenticeship program costs
Some important rules for recontribution include:
- Generally, 529 recontributions must be made within 60 days of the refund. The Internal Revenue Service has issued temporary guidance, however, making an exception to that rule. If your 60-day period ends on or after April 1 and before July 15, you can make your recontribution any time before the later of July 15 or 60 days after the refund date, whichever is later.
- The amount of your recontribution may not exceed the refunded amount. Any excess is considered a new contribution rather than a recontribution.
- The recontribution is treated entirely as principal as opposed to a mix of principal and earnings.
- The recontribution will not be counted against the beneficiary’s aggregate contribution limit, which varies state by state.
- You must recontribute the refund to a 529 plan for the same beneficiary, but not necessarily to the same 529 plan from which it was distributed.
- “Coupon refunds,” or those provided via vouchers or credits toward future college costs, do not yield a cash payment, so cannot be recontributed to a 529 plan.
Your 529 plan provider can give you specific instructions on how to submit a 529 recontribution, but here are some general steps:
- Print out records of the date and amount of the refund.
- Only contribute the portion of the refund paid for by 529 withdrawals.
- Include a letter with the account number, student beneficiary, and date and amount of the original withdrawal.
- Include an explicit statement that you are making a recontribution of a qualified withdrawal.
- State that the recontribution is being made within 60 days of the refund.
You Can Apply the Refund to Other Qualifies Expenses
You may want to apply the refund money to other qualified 529 expenses that you’ll incur in the same tax year:
- Did you buy computer equipment, peripherals, software, or fancier internet service when your college student decamped to home sweet home? These expenses may well qualify. Will you be paying tuition or buying books and technology for summer or fall sessions? These likely also qualify.
- As you consider, college options moving forward, remember you can use 529 funds to pay for online learning from qualified providers.
- You can use the refund money to pay down student loans but beware. If you need to reborrow the equivalent of the refund amount later, this option may not make sound financial sense.
Once again, a word to the wise—receipts! Make sure if you must prove you did the right thing, you have the paperwork (yes, paperwork—print out a copy of relevant electronic records) to back up your claims.
The timing and details of 529 recontribution issues may get complicated, especially if your student is now considering a gap semester or year to wait out the pandemic’s effects. FJY Financial is here for you to help ensure you chose the options that make the most sense for your finances…and your life!