529 distribution procedure

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Topic Author
Admiral
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529 distribution procedure

Post by Admiral » Thu Oct 31, 2019 8:31 am

I'm thinking that I may take two distributions for 2019 to pay for my kids' private school tuition. I would then replace the money from cash flow, effectively using the 529s as a pass through to capture the state tax deduction.

Is there anything to be aware of, tax wise, if I do this? I assume that Vanguard (where the 529s are held, State of Nevada, though I am in PA) issues a distribution form that is used when filing taxes? Does one need proof (receipt) from the educational institution (like a bill)?

Basically, the transaction would go like this:
Contribution:
My bank account>two 529 plans
Distribution:
Two 529 plans> my bank account
Payment:
My bank account> private school


Seem kosher? Any gotchas? I am looking at $12,000, or $6k to/from each account. The savings would be on the order of 3%.

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goodenyou
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Re: 529 distribution procedure

Post by goodenyou » Thu Oct 31, 2019 8:37 am

Admiral wrote:
Thu Oct 31, 2019 8:31 am
I'm thinking that I may take two distributions for 2019 to pay for my kids' private school tuition. I would then replace the money from cash flow, effectively using the 529s as a pass through to capture the state tax deduction.

Is there anything to be aware of, tax wise, if I do this? I assume that Vanguard (where the 529s are held, State of Nevada, though I am in PA) issues a distribution form that is used when filing taxes? Does one need proof (receipt) from the educational institution (like a bill)?

Basically, the transaction would go like this:
Contribution:
My bank account>two 529 plans
Distribution:
Two 529 plans> my bank account
Payment:
My bank account> private school


Seem kosher? Any gotchas? I am looking at $12,000, of $6k to/from each account. The savings would be on the order of 3%.
Why not just have the 529 Plan send it directly to the qualified institution? I think it’s cleaner that way, if it’s possible. I sometimes have to reimburse myself out of the 529, and I keep a spreadsheet of all the transactions with the dates. Be sure you keep the tax year calendar and academic calendar in line for your distributions.
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RickBoglehead
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Re: 529 distribution procedure

Post by RickBoglehead » Thu Oct 31, 2019 8:39 am

Vanguard will issue you a 1099-Q for the withdrawals, which will pro-rate contributions and earnings.

The school will issue you a 1098-T.

When you file your taxes, you will enter these forms, plus any other expenditures that you made (off campus housing, food, books, etc.).

You will need to keep receipts for all your payments, plus you will need to keep from the school's website their Cost of Attendance figures, which is how you show, if audited, that the spending you did was in line.
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Topic Author
Admiral
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Re: 529 distribution procedure

Post by Admiral » Thu Oct 31, 2019 8:42 am

RickBoglehead wrote:
Thu Oct 31, 2019 8:39 am
Vanguard will issue you a 1099-Q for the withdrawals, which will pro-rate contributions and earnings.

The school will issue you a 1098-T.

When you file your taxes, you will enter these forms, plus any other expenditures that you made (off campus housing, food, books, etc.).

You will need to keep receipts for all your payments, plus you will need to keep from the school's website their Cost of Attendance figures, which is how you show, if audited, that the spending you did was in line.
Vanguard will issue you a 1099-Q for the withdrawals, which will pro-rate contributions and earnings.
Why is this necessary for a qualified distribution, which is a non-taxable event? Just for record keeping?
The school will issue you a 1098-T.
I assume this would only happen if Vanguard pays the school. If it's me paying, then it's just me paying and they get a check. Right? I've never received such a form before.

Spirit Rider
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Re: 529 distribution procedure

Post by Spirit Rider » Thu Oct 31, 2019 9:21 am

Admiral wrote:
Thu Oct 31, 2019 8:42 am
RickBoglehead wrote:
Thu Oct 31, 2019 8:39 am
Vanguard will issue you a 1099-Q for the withdrawals, which will pro-rate contributions and earnings.
Why is this necessary for a qualified distribution, which is a non-taxable event? Just for record keeping?
Vanguard or any other 529 custodian has no idea whether you have qualified educational expenses.
The school will issue you a 1098-T.
I assume this would only happen if Vanguard pays the school. If it's me paying, then it's just me paying and they get a check. Right? I've never received such a form before.
A 1098-T is issued for all students regardless if they have a 529, take deductions, etc...

Most schools do not mail them anymore. They are available for download through the student's financial accounts.

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RickBoglehead
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Re: 529 distribution procedure

Post by RickBoglehead » Thu Oct 31, 2019 9:41 am

^^^ What he said :D

Most parents never log on to get the form. Don't know how they do their taxes though. :shock:
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SchruteB&B
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Re: 529 distribution procedure

Post by SchruteB&B » Thu Oct 31, 2019 9:58 am

RickBoglehead wrote:
Thu Oct 31, 2019 9:41 am
^^^ What he said :D

Most parents never log on to get the form. Don't know how they do their taxes though. :shock:
Never could seem to find the 1098 last year. I didn’t have a parent account to log in to, and it wasn’t in my child’s account that we could see. Anyway, why would I have needed it for doing taxes? I know how much all the qualified expenses were (including room and board which I believe aren’t even reported on the 1098?) and it matches precisely the amount distributed from the 529. Therefore there was nothing to report on the tax return!

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RickBoglehead
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Re: 529 distribution procedure

Post by RickBoglehead » Thu Oct 31, 2019 10:03 am

SchruteB&B wrote:
Thu Oct 31, 2019 9:58 am
RickBoglehead wrote:
Thu Oct 31, 2019 9:41 am
^^^ What he said :D

Most parents never log on to get the form. Don't know how they do their taxes though. :shock:
Never could seem to find the 1098 last year. I didn’t have a parent account to log in to, and it wasn’t in my child’s account that we could see. Anyway, why would I have needed it for doing taxes? I know how much all the qualified expenses were (including room and board which I believe aren’t even reported on the 1098?) and it matches precisely the amount distributed from the 529. Therefore there was nothing to report on the tax return!
For those that use TurboTax, the software has you enter in (or download) forms. You simply fill the boxes in and it does the rest. Sure, you can do a return without the form, but those who simply follow the TT interview will get asked if they have one.

As for accounts, we setup a parent account for both our kids, and then went into the kid's account to provide access to the parent. This included grades. Our perspective was that if we were paying $40,000+ per year, there were no "secrets", no "well, last semester I dropped out". We were surprised at how friends had no clue how their kids were doing, because they had no access and never asked the child.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

SchruteB&B
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Re: 529 distribution procedure

Post by SchruteB&B » Thu Oct 31, 2019 10:06 am

RickBoglehead wrote:
Thu Oct 31, 2019 10:03 am
SchruteB&B wrote:
Thu Oct 31, 2019 9:58 am
RickBoglehead wrote:
Thu Oct 31, 2019 9:41 am
^^^ What he said :D

Most parents never log on to get the form. Don't know how they do their taxes though. :shock:
Never could seem to find the 1098 last year. I didn’t have a parent account to log in to, and it wasn’t in my child’s account that we could see. Anyway, why would I have needed it for doing taxes? I know how much all the qualified expenses were (including room and board which I believe aren’t even reported on the 1098?) and it matches precisely the amount distributed from the 529. Therefore there was nothing to report on the tax return!
For those that use TurboTax, the software has you enter in (or download) forms. You simply fill the boxes in and it does the rest. Sure, you can do a return without the form, but those who simply follow the TT interview will get asked if they have one.

As for accounts, we setup a parent account for both our kids, and then went into the kid's account to provide access to the parent. This included grades. Our perspective was that if we were paying $40,000+ per year, there were no "secrets", no "well, last semester I dropped out". We were surprised at how friends had no clue how their kids were doing, because they had no access and never asked the child.
I don’t use Turbo Tax. My child’s school did not have parent accounts.

lakpr
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Re: 529 distribution procedure

Post by lakpr » Thu Oct 31, 2019 10:09 am

Confirming here that schools do issue 1098-T, regardless of where the tuition money came from. DW took graduate classes at a nearby university, we paid out of cash flow, the 1098-T forms were available under her student login to the university at the end of the year.

lakpr
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Re: 529 distribution procedure

Post by lakpr » Thu Oct 31, 2019 10:10 am

SchruteB&B wrote:
Thu Oct 31, 2019 10:06 am
I don’t use Turbo Tax. My child’s school did not have parent accounts.
You should be able to call the university and ask them to mail the 1098-T forms. Or you may have to force your child to look for them under their student login to the university portal and print the PDFs out.

marcopolo
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Re: 529 distribution procedure

Post by marcopolo » Thu Oct 31, 2019 12:11 pm

RickBoglehead wrote:
Thu Oct 31, 2019 8:39 am
Vanguard will issue you a 1099-Q for the withdrawals, which will pro-rate contributions and earnings.

The school will issue you a 1098-T.

When you file your taxes, you will enter these forms, plus any other expenditures that you made (off campus housing, food, books, etc.).

You will need to keep receipts for all your payments, plus you will need to keep from the school's website their Cost of Attendance figures, which is how you show, if audited, that the spending you did was in line.
Good idea to keep receipts and records.

But, you do not need to enter all these forms when dfoing your taxes. 1098-T is pretty much useless. You only need to report any taxable withdrawals from 529 plans. Keep withdrawals below QHEE, and there is nothing to report/file at tax time.
Once in a while you get shown the light, in the strangest of places if you look at it right.

NotWhoYouThink
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Re: 529 distribution procedure

Post by NotWhoYouThink » Thu Oct 31, 2019 4:49 pm

I have never seen a 1098-T that matched my expenses for that calendar year. You need to keep track of expenses, and keep payments and withdrawals in the same calendar year, but can ignore the 1098-T.

marcopolo
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Re: 529 distribution procedure

Post by marcopolo » Thu Oct 31, 2019 5:33 pm

lakpr wrote:
Thu Oct 31, 2019 10:10 am
SchruteB&B wrote:
Thu Oct 31, 2019 10:06 am
I don’t use Turbo Tax. My child’s school did not have parent accounts.
You should be able to call the university and ask them to mail the 1098-T forms. Or you may have to force your child to look for them under their student login to the university portal and print the PDFs out.
Curious what you do with the 1098-T?

We have found them to be essentially useless. They typically report what the tuition (only tuition) bill was for the year.
That is only a part of what you are actually spending. Your actual qualified spending is what is counted in QHEE that is used to figure how much you can withdraw from a 529 without worrying about taxes or penalties. The amounts on the 1098-T is just one entry, which you should already have from when you paid the tuition bill. In fact, the 1098-T can even be misleading if it reports charged amounts in one year that you paid the following year. The QHEE is calculated based on when you actually paid the bill.
Once in a while you get shown the light, in the strangest of places if you look at it right.

momvesting
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Re: 529 distribution procedure

Post by momvesting » Thu Oct 31, 2019 6:07 pm

From the way the OP said "private school", I was assuming K-12, not college. I am doing that, but there are 2 things to remember:

1. The max is $10k/kid. OP mentions $12k but that might be for multiple kids. If so, you need to do everything separately.
2. No, the school is not going to give you any kind of tax form, at least ours doesn't. You just need to keep all the info in case you are audited.

Also, in case it comes to this, keep in mind that K-12 schools operate on a school year basis, but Uncle Sam does not. While my child's school is just under $10k, this year they changed when the due dates are for monthly payments, so I have more than $10k due in one calendar year (we used to pay 10 payments September-June, now it is 11 payments July-May). It is up to you to keep track if something like that changes.

lakpr
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Re: 529 distribution procedure

Post by lakpr » Thu Oct 31, 2019 6:49 pm

marcopolo wrote:
Thu Oct 31, 2019 5:33 pm
lakpr wrote:
Thu Oct 31, 2019 10:10 am
SchruteB&B wrote:
Thu Oct 31, 2019 10:06 am
I don’t use Turbo Tax. My child’s school did not have parent accounts.
You should be able to call the university and ask them to mail the 1098-T forms. Or you may have to force your child to look for them under their student login to the university portal and print the PDFs out.
Curious what you do with the 1098-T?

We have found them to be essentially useless. They typically report what the tuition (only tuition) bill was for the year.
That is only a part of what you are actually spending. Your actual qualified spending is what is counted in QHEE that is used to figure how much you can withdraw from a 529 without worrying about taxes or penalties. The amounts on the 1098-T is just one entry, which you should already have from when you paid the tuition bill. In fact, the 1098-T can even be misleading if it reports charged amounts in one year that you paid the following year. The QHEE is calculated based on when you actually paid the bill.
It's probably true that the 1098-T is useless. DW took the classes towards her graduate studies, and we were above the income limit for the Lifetime Learning Credit, and of course this being her graduate studies, the AOTC wasn't applicable. We also paid for it from our cash flow, not any 529 accounts (we have opened them for our kids and we didn't want to drain them), so essentially this is just a useless piece of information.

We may have the opportunity to brush up on the 529 distributions procedure in about 6 years

Topic Author
Admiral
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Re: 529 distribution procedure

Post by Admiral » Fri Nov 01, 2019 9:31 am

momvesting wrote:
Thu Oct 31, 2019 6:07 pm
From the way the OP said "private school", I was assuming K-12, not college. I am doing that, but there are 2 things to remember:

1. The max is $10k/kid. OP mentions $12k but that might be for multiple kids. If so, you need to do everything separately.
2. No, the school is not going to give you any kind of tax form, at least ours doesn't. You just need to keep all the info in case you are audited.

Also, in case it comes to this, keep in mind that K-12 schools operate on a school year basis, but Uncle Sam does not. While my child's school is just under $10k, this year they changed when the due dates are for monthly payments, so I have more than $10k due in one calendar year (we used to pay 10 payments September-June, now it is 11 payments July-May). It is up to you to keep track if something like that changes.
That is correct. 2 children. I was going to take 6k in distributions for each one, and add 6k each back to their 529s. I'm waiting to hear from my accountant but from what's above it doesn't sound like a big deal.

Horsefly
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Re: 529 distribution procedure

Post by Horsefly » Fri Nov 01, 2019 10:07 am

Our kids are both graduated now, but I used 529's exclusively for their college expenses.
  • We NEVER had the 529 checks sent directly to the school. I always had them do a direct deposit in my checking account, and I'd pay the school from there.
  • We only used the 1098T except maybe one year as a form of receipt. We kept the bill from the school as the recept most times.
  • We used the 529 to pay for tuition, rent (up to on-campus housing rate), book, and fees. I get the feeling too many people feel they can only use it for tuition.
One year the IRS sent me a bill saying that I owed taxes and penalties for non-qualified distributions from my older daughters 529. I sent them a letter with all the info, and they said thanks and closed to case. Turns out my tax preparer (CPA) had somehow marked the distributions as non-qualified on my return. :oops:

Topic Author
Admiral
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Re: 529 distribution procedure

Post by Admiral » Fri Nov 01, 2019 10:13 am

Horsefly wrote:
Fri Nov 01, 2019 10:07 am
Our kids are both graduated now, but I used 529's exclusively for their college expenses.
  • We NEVER had the 529 checks sent directly to the school. I always had them do a direct deposit in my checking account, and I'd pay the school from there.
  • We only used the 1098T except maybe one year as a form of receipt. We kept the bill from the school as the recept most times.
  • We used the 529 to pay for tuition, rent (up to on-campus housing rate), book, and fees. I get the feeling too many people feel they can only use it for tuition.
One year the IRS sent me a bill saying that I owed taxes and penalties for non-qualified distributions from my older daughters 529. I sent them a letter with all the info, and they said thanks and closed to case. Turns out my tax preparer (CPA) had somehow marked the distributions as non-qualified on my return. :oops:
For K-12, the rule is tuition only, so there's a difference b/w that and college.

Horsefly
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Re: 529 distribution procedure

Post by Horsefly » Fri Nov 01, 2019 10:18 am

Ah, good point. The K-12 use of 529s was not a thing when I was dealing with them.

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