Higher ed institutions are reimbursing some students for expenses. If those expenses were paid via 529 plans, you should roll that money back into the plan. Here’s why.
First, if these expenses were originally paid using qualified 529 plan funds, think about taking that cash reimbursement and depositing it back into your 529 plan. Individuals receiving cash reimbursements can recontribute back into their 529 plans within 60 days of receiving the money from their school.
Reimbursements contributed back to your 529 plan won’t count toward the plan’s contribution limit. Just be sure to verify the process for making the recontribution with your advisor or 529 plan administrator.
Other qualified expenses
An alternative to recontributing the funds is to spend them on other qualified expenses incurred for the year but not otherwise covered by 529 distributions. For example, you might be able to use 529 funds to purchase technology needed to complete online courses, since computers, peripherals, and other related items are considered a qualified expense. That said, this is situation-dependent so be sure to discuss it with your plan administrator or tax advisor.
Credits and vouchers
Not receiving cash back? Credits and vouchers toward future costs can’t be recontributed. Instead, keep careful track of them, and apply them according to the terms your school puts in place.
Tax and penalties
If you don’t complete the recontribution or can’t find other qualified expenses to apply the reimbursement to, the earnings portion of the reimbursement will be subject to income tax — and a 10% penalty. The calculation of earnings isn’t likely to be straightforward, adding complexity to the process. If state tax breaks were received on contributions, recapture issues could arise. And whether the income is taxable to the owner or the beneficiary depends on how the original distribution took place. Suffice it to say, it’s in your best interest to complete the recontribution in a timely manner to avoid any penalties.
It’s in your best interest to complete the recontribution in a timely manner to avoid any penalties.
In addition to 529 plans, these same considerations apply to all qualified tuition plans, including prepaid tuition plans. Have questions about tuition plans? Feel free to reach out — we’re happy to help.