529 Questions. Double tax breaks?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Oompadeedoo
Posts: 31
Joined: Mon May 22, 2017 11:15 am

529 Questions. Double tax breaks?

Post by Oompadeedoo »

Two questions about 529 accounts, illustrated with hypothetical scenarios...

- Say I have a 529 account in my name. However, my grandparents have graciously offered to pay for my tuition bill as it can be done tax free if paid directly (no gift tax). Let's say tuition was 50K and qualified expenses (room board etc) were 20K. Would I be able to withdraw 20K or 70K tax free (assume all in same year)?

- Are there any rules with what you can do with your money after you withdraw before you pay? Say I withdraw in January and no payment is due until August. Could I invest that money in the mean time or does it have to sit in a saving account. I assume that as long as I eventually pay my qualified exoenses by whatever means that it would be fine but a bit unclear.

Thank you all, I love this forum.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: 529 Questions. Double tax breaks?

Post by Spirit Rider »

Your plan is sound.

Qualified Education Expenses are not reduced by gifts. You would be allowed to withdraw tax free, all qualified (tuition, fees, text books, room and board, computer equipment, etc...) expenses from a 529 plan. You need to have proof of the expenses and payments to make qualified withdrawals.

Actual payments or the money for them can be gifts, direct or indirect. Only direct payments for tuition receive an exclusion for gift tax reporting in addition to the $14K annual exclusion. Your grandparents would only be subject to gift taxes/estate taxes only when the total of reported gifts and their estate exceed the unified lifetime exclusion.

You generally would want make 529 withdrawals later in the year to allow any earnings to be tax free. Just be sure that expense payments and 529 withdrawals occur in the same year. Other than that there is no restrictions once the withdrawals are made.
User avatar
Nate79
Posts: 9372
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: 529 Questions. Double tax breaks?

Post by Nate79 »

Where is the double tax break? I'm not seeing it.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: 529 Questions. Double tax breaks?

Post by Grt2bOutdoors »

Nate79 wrote:Where is the double tax break? I'm not seeing it.
No gift tax paid by grandparents.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
Oompadeedoo
Posts: 31
Joined: Mon May 22, 2017 11:15 am

Re: 529 Questions. Double tax breaks?

Post by Oompadeedoo »

This seems like a loophole to gift money to your children or grandchildren. If you have sufficient money, why not fill up a 529 and then pay for the tuition yourself, allowing your beneficiary to withdraw funds tax free (up to the tuition amount for the year) and keep for themselves.
4strings
Posts: 161
Joined: Fri Feb 19, 2010 3:49 pm

Re: 529 Questions. Double tax breaks?

Post by 4strings »

Oompadeedoo wrote:This seems like a loophole to gift money to your children or grandchildren. If you have sufficient money, why not fill up a 529 and then pay for the tuition yourself, allowing your beneficiary to withdraw funds tax free (up to the tuition amount for the year) and keep for themselves.
If a grandparent provides any type of financial support to the student, that support is reportable on the following year’s FAFSA as student income. The financial aid formula counts student income just as it counts student assets (although the assessment percentages and allowances are different). Most financial aid offices interpret the rules as requiring distributions from grandparent-owned 529s to be included as student income, even when the distributions are not reportable for federal income taxes (i.e. they are tax-free).

If a grandparent were to use the 529 account only to pay for the final year in college, then the income rule would not make any difference, since the student will not be applying for financial aid for the following year.
User avatar
ps56k
Posts: 980
Joined: Sat Mar 19, 2011 1:28 pm
Location: Chicago area

Re: 529 Questions. Double tax breaks?

Post by ps56k »

don't know where you are located -
but here in Illinois - the BrightStart 529 gives a IL 1040 tax break for contributions to their 529 plan.
Last edited by ps56k on Wed May 24, 2017 5:59 pm, edited 1 time in total.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: 529 Questions. Double tax breaks?

Post by Spirit Rider »

4strings wrote:If a grandparent were to use the 529 account only to pay for the final year in college, then the income rule would not make any difference, since the student will not be applying for financial aid for the following year.
Starting with the 2017/2018 school year, FAFSA uses the prior-prior tax year. So grandparents or other third parties can fund after 1/1 of the last 2 1/2 years.
inbox788
Posts: 8372
Joined: Thu Mar 15, 2012 5:24 pm

Re: 529 Questions. Double tax breaks?

Post by inbox788 »

Oompadeedoo wrote:- Are there any rules with what you can do with your money after you withdraw before you pay? Say I withdraw in January and no payment is due until August. Could I invest that money in the mean time or does it have to sit in a saving account. I assume that as long as I eventually pay my qualified exoenses by whatever means that it would be fine but a bit unclear.
Why take it out of a 529 where the earnings are tax-free and move it to a taxable account? Are withdrawals aligned to tax years or academic calendar or both?
Oompadeedoo wrote:This seems like a loophole to gift money to your children or grandchildren. If you have sufficient money, why not fill up a 529 and then pay for the tuition yourself, allowing your beneficiary to withdraw funds tax free (up to the tuition amount for the year) and keep for themselves.
If the parents own the 529 with child as beneficiary, and the grandparents pay the tuition directly, who gets the funds from the 529, the parent or the child?

If the grandparents (high tax bracket) had highly appreciated stock instead of just cash, and gift tax isn't expected to be an issue, would UTMA be a better option?

Trying to separate the 2 tax issues, tax-free benefit of a 529 account vs gift tax/inheritance.
Post Reply