Did the recent coronavirus outbreak close your educational institution? Did you pay for your expenses with funds from a 529 plan? It is important to understand how you will be affected if this applies to you.
The recent Covid-19 outbreak has forced the closure and move to online classes for many educational institutions. They are going to be processing reimbursements for room and board, tuition, and other expenses due to the closure of their campuses. This complicates things for those that may have paid for these expenses by using their 529 plan. Typically, you can only use funds from your 529 to pay for expenses incurred in the current year. Funds withdrawn in excess of the expenses incurred would be considered a non-qualified distribution. This type of distribution would be taxable plus a 10% penalty at the beneficiary’s tax rate.
Families that have or are expecting to receive a refund should understand what options they have to avoid an unnecessary tax. In most instances you would have 60 days, from the point you receive the refund, to return the unused portion of the funds that have been withdrawn from the account to avoid the tax. The IRS has recently issued guidance under the CARES Act that although the 60 days window still applies, a beneficiary that received a refund after February 1, 2020, will have until July 15, 2020, to return the funds to their 529 plan.
It is important that you do not return more than the refund to the plan. The additional amount will be considered a new contribution. You must also return the funds to an account for the same beneficiary, so make sure you are returning it to the right account. The option to keep the refund is possible, but it will then be considered a non-qualified distribution which will be taxed as mentioned above.
You will want to make sure that you have an accurate accounting of what has taken place. It is advised that beneficiaries and account owners document all the transactions that have happened with the 529 plan if you need to justify how the refund was handled. Having this documentation could ultimately help you avoid unnecessary tax and penalties.
It is highly recommended that you contact your 529 plan provider and accountant to learn the steps needed for returning the funds to your account. This will assure that you handle it the right way and your tax advisor is aware you have returned the funds. Both will also know that you are returning these funds and it should not be treated as a new contribution.
We would be happy to discuss your situation regarding refunds you have received back from your qualified educational institution if you had paid them with assets from a 529 plan. Just contact us, Mitlin Financial, at (844) 4-MITLIN x12 to schedule a time for this review. Be sure to share this article with friends, family, and business acquaintances who might be interested too. We look forward to helping you, and them, get on the right path and stay there.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.