COLLEGE SAVINGS 101

Savingforcollege.com

I withdrew too much 529 money. Now what?
http://www.savingforcollege.com/articles/i-withdrew-too-much-529-money-now-what-1016

Posted: 2016-12-22

by Kathryn Flynn

When saving for college with a 529 plan, sometimes a simple mistake like taking out too much money can end up being costly. There are a number of reasons why parents end up with an over-withdrawal, like selecting "total withdrawal" when you wanted a "partial withdrawal," withdrawing from the wrong child's account, or ending up with a refund because your child withdrew from school.

In most cases, you'll want to avoid putting money from an over-withdrawal back into your 529 plan. The plan administrator will treat the replacement money as a new contribution, and it will have no effect on your original distribution. That means if you mistakenly took a non-qualified withdrawal you would still incur income tax and a 10 percent penalty on the earnings portion.

The good news is that depending on your reason and how you handle the situation you won't always end up paying taxes or a penalty. Here are six tips on how to soften the blow when you withdraw too much from a 529:

1. You may be eligible to put the money back into the same 529 plan

If you are refunded money by the school, for example if your child drops a class or withdraws, you can avoid paying taxes or penalties if the refund is deposited back into the 529 account within 60 days.

2. Look for other qualifying expenses

Is it possible you overlooked a qualifying education expense? Make sure you've included everything you've paid in the year for tuition, fees, books, room and board and any computers or other related equipment. Once you have your total, subtract the amount used to generate the American Opportunity Tax Credit. If the resulting amount is greater than or equal to your total 529 withdrawals for the year, you will not be subject to taxes or penalty.

3. Roll the funds into another 529 plan

If your over-withdrawal was an accident, one way to keep your savings intact without having to pay taxes or penalty is to roll the funds into another 529 account within 60 days. Keep in mind, however, that a 529 plan beneficiary is only allowed one tax-free rollover in a 12-month period. If you've reached your limit, you can always roll the funds into a 529 account for another qualifying family member.

RELATED:Avoid these 529 withdrawal traps

4. Take 529 withdrawals later in the year

By waiting until December to take your 529 withdrawals, you'll have a better idea about the total amount of qualified higher education expenses incurred during the year and how much can be withdrawn tax-free. Also, if the 529 account is appreciating in value, the delay could generate even more tax-free returns.

5. Pay spring tuition before year-end

Paying your child's spring tuition bill before December 31st will boost your total qualified education expenses, and could help cover any non-qualified withdrawals taken by mistake.

6. Account for scholarships

If your child receives a scholarship, withdrawals up to the amount of the award will be subject to tax on the earnings portion, but not to the 10% penalty. Be sure to account for all scholarships and grants your child received the penalty waiver can also be applied to awards from prior years. And remember, although the penalty is waived, the earnings portion of your withdrawal will still be subject to income tax.

RELATED:The truth about scholarships and 529 plans

When saving for college with a 529 plan, sometimes a simple mistake like taking out too much money can end up being costly. There are a number of reasons why parents end up with an over-withdrawal, like selecting "total withdrawal" when you wanted a "partial withdrawal," withdrawing from the wrong child's account, or ending up with a refund because your child withdrew from school.

In most cases, you'll want to avoid putting money from an over-withdrawal back into your 529 plan. The plan administrator will treat the replacement money as a new contribution, and it will have no effect on your original distribution. That means if you mistakenly took a non-qualified withdrawal you would still incur income tax and a 10 percent penalty on the earnings portion.

The good news is that depending on your reason and how you handle the situation you won't always end up paying taxes or a penalty. Here are six tips on how to soften the blow when you withdraw too much from a 529:

1. You may be eligible to put the money back into the same 529 plan

If you are refunded money by the school, for example if your child drops a class or withdraws, you can avoid paying taxes or penalties if the refund is deposited back into the 529 account within 60 days.

2. Look for other qualifying expenses

Is it possible you overlooked a qualifying education expense? Make sure you've included everything you've paid in the year for tuition, fees, books, room and board and any computers or other related equipment. Once you have your total, subtract the amount used to generate the American Opportunity Tax Credit. If the resulting amount is greater than or equal to your total 529 withdrawals for the year, you will not be subject to taxes or penalty.

3. Roll the funds into another 529 plan

If your over-withdrawal was an accident, one way to keep your savings intact without having to pay taxes or penalty is to roll the funds into another 529 account within 60 days. Keep in mind, however, that a 529 plan beneficiary is only allowed one tax-free rollover in a 12-month period. If you've reached your limit, you can always roll the funds into a 529 account for another qualifying family member.

RELATED:Avoid these 529 withdrawal traps

4. Take 529 withdrawals later in the year

By waiting until December to take your 529 withdrawals, you'll have a better idea about the total amount of qualified higher education expenses incurred during the year and how much can be withdrawn tax-free. Also, if the 529 account is appreciating in value, the delay could generate even more tax-free returns.

5. Pay spring tuition before year-end

Paying your child's spring tuition bill before December 31st will boost your total qualified education expenses, and could help cover any non-qualified withdrawals taken by mistake.

6. Account for scholarships

If your child receives a scholarship, withdrawals up to the amount of the award will be subject to tax on the earnings portion, but not to the 10% penalty. Be sure to account for all scholarships and grants your child received the penalty waiver can also be applied to awards from prior years. And remember, although the penalty is waived, the earnings portion of your withdrawal will still be subject to income tax.

RELATED:The truth about scholarships and 529 plans

 

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