Post-9/11 GI bill transfer and 529 withdrawls

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TheMilPhys
Posts: 12
Joined: Thu Jul 06, 2017 9:32 pm

Post-9/11 GI bill transfer and 529 withdrawls

Post by TheMilPhys » Thu Jan 18, 2018 6:46 pm

Quick BLUF: When I use my post-9/11 GI bill for my child's education, am I exempt from the 10% non-qualified distribution tax?

My wife and I have TWO post-9/11 GI bills which we already elected to transfer benefits to our children. We have one child and one on the way. My wife wants 3 or 4 kids, I'd be happy with 2 :D Anyway, we are fortunate enough to max both TSPs, Roth IRA's and other taxable investments. I have some additional money I was going to place in to Nevada's 529 :wink: and fund non-aggressively for additional educational costs not covered by post-9/11...or for a 3rd/4th child.

During my research in to the tax implications if I never need the 529 plan for our kids, "veterans educational benefits" is listed as an exception for the 10% additional tax applied to non-qualified distributions (just like a scholarship or grant). (FYI I do understand it can be passed on to any other family member but this is not how I like to plan my investment strategies...I am considering this only for either my children's education or our estate in the future)

Therefore, when I use our post-9/11 GI bills for their education, will I be able to withdraw from the 529 plan an amount equal or less than the GI bill payout penalty-free and just pay income tax on it?

If this is the case then why not fund a 529 plan if I have already maxed out my other tax deferred and tax-free investment strategies? It would be an additional tax-deferred account that I wouldn't have to worry about paying the "non-education 10%" on up to an amount equal to GI bill payouts. i.e. the post-9/11 GI bill is a protection of that amount of money in a 529 account.

I guess the argument is why not just put it in a taxable account and pay long-term capital gains on it instead of income tax...but if I do need it for education it would be completely tax-free. The difference between 15% and 25-ish% isn't horrible for the benefit of knowing I might need it for education and pay 0%

DIFAR31
Posts: 45
Joined: Mon Jan 01, 2018 5:51 pm

Re: Post-9/11 GI bill transfer and 529 withdrawls

Post by DIFAR31 » Thu Jan 18, 2018 7:20 pm

The earnings portion of a 529 distribution that is taken in relation to G.I. Bill dollars used to pay for qualified expenses (in other words, not the BHA dollars) is not subject to the 10% additional tax.

TheMilPhys
Posts: 12
Joined: Thu Jul 06, 2017 9:32 pm

Re: Post-9/11 GI bill transfer and 529 withdrawls

Post by TheMilPhys » Thu Jan 18, 2018 7:48 pm

DIFAR31 wrote:
Thu Jan 18, 2018 7:20 pm
The earnings portion of a 529 distribution that is taken in relation to G.I. Bill dollars used to pay for qualified expenses (in other words, not the BHA dollars) is not subject to the 10% additional tax.
BHA being housing allowance? I thought that housing related to education was still a qualified distribution for a 529, so why wouldn't the GI bill housing allowance portion be included in the amount of non-qualified withdrawals from 529 penalty-free? Thanks for your help!

DIFAR31
Posts: 45
Joined: Mon Jan 01, 2018 5:51 pm

Re: Post-9/11 GI bill transfer and 529 withdrawls

Post by DIFAR31 » Thu Jan 18, 2018 10:26 pm

TheMilPhys wrote:
Thu Jan 18, 2018 7:48 pm
BHA being housing allowance? I thought that housing related to education was still a qualified distribution for a 529, so why wouldn't the GI bill housing allowance portion be included in the amount of non-qualified withdrawals from 529 penalty-free? Thanks for your help!
You raise an interesting point, which did not initially occur to me because
1) I was focusing on the definition of Qualified Education Expenses as it applies to pretty much everything except 529 expenses and where room and board is not a qualified expense; and
2) Using pretty much any other scholarship or grant to pay for room and board makes the scholarship or grant taxable, which means that it is then ineligible to use as a reason for taking a 529 distribution without incurring the 10% additional penalty. In contrast, the BHA component of the G.I. Bill is of course not taxable.

I don't think it's an easy call either way. Getting a professional opinion that you can rely on might be a smart move.

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