529 Question - reversing a superfund in the same calendar year?

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Topic Author
grkmec
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529 Question - reversing a superfund in the same calendar year?

Post by grkmec »

This year (2018) my wife and I superfunded 3 kids worth of 529 contributions:

3 kids x 5 years x 15k per parent x 2 parents = 450k.

This was due in part to pay for private high school and college. However, now my wife is having second thoughts about private high school, and we are exploring moving to an adjoining town with excellent schools. Big difference is I would need to sell my house and buy one twice as expensive (eg. 1.7mm to 3.5mm).

So, can I reverse the 450k I have made in 529 plans in 2018 without any tax issues, assuming no material gains or losses on this money?

Thanks
Topic Author
grkmec
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by grkmec »

grkmec wrote: Sat Oct 20, 2018 8:01 am This year (2018) my wife and I superfunded 3 kids worth of 529 contributions:

3 kids x 5 years x 15k per parent x 2 parents = 450k.

This was due in part to pay for private high school and college. However, now my wife is having second thoughts about private high school, and we are exploring moving to an adjoining town with excellent schools. Big difference is I would need to sell my house and buy one twice as expensive (eg. 1.7mm to 3.5mm).

So, can I reverse the 450k I have made in 529 plans in 2018 without any tax issues, assuming no material gains or losses on this money?

Thanks
EDIT - the superfund on the kid #1 and kid #2 is commingled with prior year contributions. Kid #3 was born in 2018, so the only money in that 529 is the super fund money. So to further clarify my question - once you make a contribution, does it become commingled with prior year to the extend prior years have gains in them?
Spirit Rider
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by Spirit Rider »

This will be a non-qualified 529 distribution. The earnings on the contributions will be subject to a 10% penalty and ordinary income taxes.

Since it has been a short time frame the earnings percentage should be modest, but maybe a significant dollar amount given the large contributions.

It is not all or nothing. Only a pro-rated amount of the total contributions and earnings per account of the actual distribution will be involved. There is no way to isolate the prior contributions/earnings if they are in the same account.
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grkmec
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by grkmec »

Earnings are actually negative year to date for all three kids.

So you are saying that because kids #1 and kids #2 have positive inception to date investment returns, I would be hit with taxes on those because you can't segregate earnings from prior years?

Can the superfunded gifts be unwound at this point? Meaning do I still need to file gift tax returns if I take out the 150k from each account? Or are the gifts already complete and can not be undone even though we are still in same tax year?

Thanks
kaneohe
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by kaneohe »

I have no idea what the answer to your question is but I would encourage you to keep looking. There is the IRA analog to your question. In the IRA case, you can ask for a return of the current yr contribution (and assoc earnings).
However you must ask specifically for that yr contribution, not just a dollar amount. If you do that, you can even make a contribution to IRA later that yr since technically you withdrew the first contribution so effectively made no contribution.

However if you just withdraw an amount corresponding to the contribution, that is different. You will be regarded as just having withdrawn funds and not the contribution specifically. Consequences are different.....you can't contribute again that yr, you will be penalized for early-withdrawal on the whole amount if young enough, etc.

You might try asking here https://forum.savingforcollege.com/
I don't know what quality answers you will get there , but the founder of the site is supposed to be
knowledgeable . Not sure who will respond though.
Spirit Rider
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by Spirit Rider »

HSA and 529 contributions are not the same as IRA contributions. There is no way to unwind an HSA contribution once made. To my knowledge there is no way to unwind a 529 contribution. I believe you will have to file Form 709 and claim them as gifts.

From 26 U.S. Code § 529 - Qualified tuition programs.
  1. Tax treatment of designated beneficiaries and contributors, (2) Gift tax treatment of contributions
    For purposes of chapters 12 and 13—
    1. In general Any contribution to a qualified tuition program on behalf of any designated beneficiary—
      1. shall be treated as a completed gift to such beneficiary which is not a future interest in property, and
      2. shall not be treated as a qualified transfer under section 2503(e).
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HueyLD
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by HueyLD »

Slight correction to the above.

The excess HSA contribution can be removed within the current year just like the IRA.
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RickBoglehead
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by RickBoglehead »

Your 529 administrator can answer your questions.

Also, you can move the funds from account #1 to account #2, so if child #1 won't need all the money, another child can use it.

If you need part of the funds for a house, you may be making unqualified distributions. Going from we aren't moving and need private high school in ten plus years so let's do $450,000 of contributions to we are moving, buying twice as expensive a house, and need the money back is a pretty wide swing. You might want to sit down and write up a long term plan that you both agree on.
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Spirit Rider
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by Spirit Rider »

HueyLD wrote: Sun Oct 21, 2018 7:03 am Slight correction to the above. The excess HSA contribution can be removed within the current year just like the IRA.
Yes, that is true for both HSAs and 529s. There in fact can be excess contributions to a 529. It only applies when contributions cause the balance to exceed the maximum plan limit.

However, the OP is talking about the removal of valid contributions. That is not allowed in either HSAs or 529s.
boglebrain
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by boglebrain »

I think you should consult an accountant.

I’m pretty sure that since the new contribution had commingled with older money it will subject you to taxes and penalty on the gains. It is all proportionaly computed. This is why it is as advantageous to have separate 529 accounts for the same child.

For the youngest child you can undo it easily. I’m not sure about the gift tax filings due next April by my guess is there would be no filing due for the youngest if you withdrawal it.

You could also leave the money in for the older children with the intention of using for youngest’s college. Or even transferring 1/2 from each older child to the youngest after you resolve the youngest’s.

You could leave the older two’s contribution for the long term with intent of helping all the children with college/grad school. And if unused it could be used by them for the next generation (grandkids). If you definitely need the $300k for the home then It’s another story.
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RickBoglehead
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Re: 529 Question - reversing a superfund in the same calendar year?

Post by RickBoglehead »

boglebrain wrote: Sun Oct 21, 2018 9:18 am You could leave the older two’s contribution for the long term with intent of helping all the children with college/grad school. And if unused it could be used by them for the next generation (grandkids).
This ^^^.

Had two 529s for my kids. Both done with college including grad school, money left over. Both accounts setup with us as owners, them as beneficiaries. Neither has kids yet, and they have no idea that there are funds leftover or the amount.

I transferred a small amount from them to a new 529 that I setup for myself and took a 1 year certificate program with 7 courses courtesy of the 529 accounts. Since earnings far, far exceeded the cost of my program, in my mind it was "free".

We plan on using these accounts for future grandchildren, and will inform our sons when said grandchildren exist.
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
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