Bring Clarity to Your Finances™

Clarity Financial Planning Services is an advocate for your financial future who takes a holistic approach to your needs and goals.

Did You Get a Refund After Paying College Expenses with a 529 Plan?

College students and their families are pondering their next move with the changes in the higher educational landscape that are the result of Coronavirus-related campus closures. These are no small matters but while they grapple with whether to continue school or perhaps take a semester off, there are other issues to consider. Yahoo! Finance addresses one of these issues in “The Coronavirus-Caused 529 Plan Tax Risk You Can’t Ignore.” 

If you or the college student in your family, received a refund for tuition and/or room and board, and these fees were covered using money from a 529 College Savings Plan, you are at risk for having the IRS label these refunds as taxable since they are no longer being used for qualified educational expenses. Yahoo! Finance explains that the IRS may charge you 10% penalty plus “income taxes on a certain amount of the earnings portion of the distribution, but you wouldn’t have to pay taxes on the principal.”

The article advises:

“To avoid this risk, 529 plan account owners should consider recontributing refunded amounts into their accounts. The catch: This must be done within 60 days from the date the refund was issued.”

And this may be a tough call if you feel like you could really use that money right now as opposed to putting it back into your account. (If the money was spent immediately, then you have to prepare for a possible tax penalty.)

The article outlines the process you will need to follow to make sure the funds get placed back into the account correctly. However, you can call your Fee-Only financial advisor if you want assistance with this process. And if the money is already spent, you can still contact your financial planner for help with how you can get prepared for next tax season.