Tapping 529 Plan

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desertdug08
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Tapping 529 Plan

Post by desertdug08 »

Oldest daughter is a high school senior and will be starting college in the fall. I would like to get her a computer for Christmas that she can go off to college with, but this would not be in the calendar year in which she starts college. Legal withdrawl? I read an article that stated that it is acceptable as long as the computer is used for college, but I have always "assumed" that 529 withdrawls had to occur in years she was attending college.

Cheers,

DUG
Brody
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Re: Tapping 529 Plan

Post by Brody »

You'll have to wait until January if you want it be a qualified withdrawal.
I am the poster formerly known as Oneanddone.
jj
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Re: Tapping 529 Plan

Post by jj »

I hate to disappoint you but my understanding of 529 plans is that a computer would not count as a 'qualified' expense. Quoting the verbiage from the 529 plan we are contributing to for my child it says:

"Qualified expenses include tuition, fees, and the cost of books, supplies and equipment required for enrollment and attendance at an eligible educational institution and certain room and board expenses. Qualified expenses also include certain additional and enrollment and attendant costs for special needs beneficiaries."

I believe that the word 'required' is the key here. Although most students will have computers they are not usually 'required'. If your child has some kind of special need, then maybe....

I would be interested to see what other forum members think. We have not started withdrawing from our daughter's 529 plan yet as she is only 4. Maybe the 529 plan administrators do not check closely....

What are forum members' experiences?

jj
...it is madness to risk losing what you need in pursuing what you simply desire. Warren E. Buffett
Brody
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Re: Tapping 529 Plan

Post by Brody »

jj wrote:I hate to disappoint you but my understanding of 529 plans is that a computer would not count as a 'qualified' expense. Quoting the verbiage from the 529 plan we are contributing to for my child it says:

"Qualified expenses include tuition, fees, and the cost of books, supplies and equipment required for enrollment and attendance at an eligible educational institution and certain room and board expenses. Qualified expenses also include certain additional and enrollment and attendant costs for special needs beneficiaries."

I believe that the word 'required' is the key here. Although most students will have computers they are not usually 'required'. If your child has some kind of special need, then maybe....

I would be interested to see what other forum members think. We have not started withdrawing from our daughter's 529 plan yet as she is only 4. Maybe the 529 plan administrators do not check closely....

What are forum members' experiences?

jj
Since 2009 computers have explicitly been a qualified expense. It isn't the job of 529 plan administrators to check. They simply send a check when requested.
I am the poster formerly known as Oneanddone.
Nutaboutgolf
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Re: Tapping 529 Plan

Post by Nutaboutgolf »

I don't know if it's like this in all states or not...In my state you request a withdrawal, you get a withdrawal...It's up to the state's IRS to "red flag" and audit you during tax time...
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beyou
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Re: Tapping 529 Plan

Post by beyou »

There are federal laws regulating what is qualified, has nothing at all to do with which plan you chose.
Penguin
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Re: Tapping 529 Plan

Post by Penguin »

Qualified education expenses. These are expenses re- lated to enrollment or attendance at an eligible educational institution (defined on this page). As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time (defined on this page).
1. The following expenses must be required for enroll- ment or attendance of a designated beneficiary (de- fined on this page) at an eligible educational institution.
a. Tuition and fees.
b. Books, supplies, and equipment.
2. The purchase of computer technology, equipment, or Internet access and related services if it is to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly edu- cational in nature.)
I interpret this to mean that computer purchase is covered, but it must be in the same calendar year as you pay tuition and fees, or other required books supplies and equipment.
Have I misinterpreted this quote from Pub 970?
Jon
xerty24
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Re: Tapping 529 Plan

Post by xerty24 »

Penguin wrote:
Qualified education expenses

2. The purchase of computer technology, equipment, or Internet access and related services if it is to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly edu- cational in nature.)
I interpret this to mean that computer purchase is covered, but it must be in the same calendar year as you pay tuition and fees, or other required books supplies and equipment.
Have I misinterpreted this quote from Pub 970?
What makes you think the computer purchase has to be in a year you pay tuition or are even enrolled? If it's to be used during the time they are enrolled, it could have been purchased earlier and would seem to still qualify as long as it was indeed put to the intended use eventually.
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Penguin
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Re: Tapping 529 Plan

Post by Penguin »

xerty24 wrote:What makes you think the computer purchase has to be in a year you pay tuition or are even enrolled? If it's to be used during the time they are enrolled, it could have been purchased earlier and would seem to still qualify as long as it was indeed put to the intended use eventually.
I am having trouble understanding the syntax. What made me think the computer purchase had to be in the year tuition was paid was:
Penguin wrote:As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time (defined on this page).
That made me think that perhaps expenses that were not required or if the student was not enrolled at least half time then the expense would not be qualified.
Jon
Penguin
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Re: Tapping 529 Plan

Post by Penguin »

On reconsidering, I think you are correct, xerty. Thank you for helping me sort it out. I think the language could have been more clear.
Some expenses must be required (tuition, books, etc).
Some must be for at least half time students (room and board).
And some may be neither required or for half time students (computer equipment, special needs services).
Jon
Brody
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Re: Tapping 529 Plan

Post by Brody »

What makes you think the computer purchase has to be in a year you pay tuition or are even enrolled? If it's to be used during the time they are enrolled, it could have been purchased earlier and would seem to still qualify as long as it was indeed put to the intended use eventually.
Because this is how all QHEE work for 529 plans. It must be in the same year.
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Nutaboutgolf
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Re: Tapping 529 Plan

Post by Nutaboutgolf »

Sorry if this is a highjack, but it fits the scope of title, tapping into the 529b plan...

I paid out about $3000 to tuition this year, I opened a 529B for myself in November...Can I contribute $3000 into it today, then withdraw it ASAP and still get the tax benefit for 2011?
Brody
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Re: Tapping 529 Plan

Post by Brody »

Nutaboutgolf wrote:Sorry if this is a highjack, but it fits the scope of title, tapping into the 529b plan...

I paid out about $3000 to tuition this year, I opened a 529B for myself in November...Can I contribute $3000 into it today, then withdraw it ASAP and still get the tax benefit for 2011?

From a federal tax standpoint, there is no benefit to doing what you are doing. The federal tax benefit is tax free growth if the money is used for QHEE. You'll have no growth, thus no benefit.

Therefore, I will assume that you are asking about a state tax benefit. The answer depends upon your state.
I am the poster formerly known as Oneanddone.
3504PIR
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Re: Tapping 529 Plan

Post by 3504PIR »

jj wrote:I hate to disappoint you but my understanding of 529 plans is that a computer would not count as a 'qualified' expense. Quoting the verbiage from the 529 plan we are contributing to for my child it says:

"Qualified expenses include tuition, fees, and the cost of books, supplies and equipment required for enrollment and attendance at an eligible educational institution and certain room and board expenses. Qualified expenses also include certain additional and enrollment and attendant costs for special needs beneficiaries."

I believe that the word 'required' is the key here. Although most students will have computers they are not usually 'required'. If your child has some kind of special need, then maybe....

I would be interested to see what other forum members think. We have not started withdrawing from our daughter's 529 plan yet as she is only 4. Maybe the 529 plan administrators do not check closely....

What are forum members' experiences?

jj
Computers, specifically laptops are now "required" at most 4 year colleges and universities. Times change.
Nutaboutgolf
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Re: Tapping 529 Plan

Post by Nutaboutgolf »

Brody wrote:
Nutaboutgolf wrote:Sorry if this is a highjack, but it fits the scope of title, tapping into the 529b plan...

I paid out about $3000 to tuition this year, I opened a 529B for myself in November...Can I contribute $3000 into it today, then withdraw it ASAP and still get the tax benefit for 2011?

From a federal tax standpoint, there is no benefit to doing what you are doing. The federal tax benefit is tax free growth if the money is used for QHEE. You'll have no growth, thus no benefit.

Therefore, I will assume that you are asking about a state tax benefit. The answer depends upon your state.
Correct, the majority of states do allow you to deduct income tax even if you don't itemize. I called my 529B representative and they claim in January, the tax form you recieve just lists the contributions and withdrawals, bundled by into a lump sum for even vs listing exact dates and exact contributions/withdrawals. There is only a ten day contribute to withdrawal period. So it does appear if you have let's say $4000 in tuition for 2011, you could open a 529B today contribute $4000...Wait ten days, withdraw all $4000 and save a little in state income tax. In my situation with it being so late in the year, I'm ignoring the interest potential in favor of the 6% savings whic is my states income bracket I'm in...

I asked my rep about how the computer works...Rep claimed as stated in this thread already, you can withdraw, buy a computer and may never hear a peep from anyone. If you do hear from someone, it will be the state IRS who will either audit you or requests documentation from you school that a computer is required. That was the answer I got.
Brody
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Re: Tapping 529 Plan

Post by Brody »

It does not matter if a computer is required or not for it to be a qualified expense. Computers are EXPLICITLY a qualified expense.
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xerty24
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Re: Tapping 529 Plan

Post by xerty24 »

Brody wrote:
What makes you think the computer purchase has to be in a year you pay tuition or are even enrolled? If it's to be used during the time they are enrolled, it could have been purchased earlier and would seem to still qualify as long as it was indeed put to the intended use eventually.
Because this is how all QHEE work for 529 plans. It must be in the same year.
I agree that generally you take the money out of the 529 plan in the same year you incur the expense. Are you claiming you can't have a qualified expense in a year you don't attend college? That seems to contradict the statements in Pub 970. Here's an outline:

http://www.irs.gov/publications/p970/ch08.html
Pub 970 wrote: Qualified education expenses. These are expenses related to enrollment or attendance at an eligible educational institution (defined on this page). As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time (defined on this page).

this does not suggest that all expenses must either be required or incurred during enrollment, as the text below makes clear

1. The following expenses must be required for enrollment or attendance of a designated beneficiary (defined on this page) at an eligible educational institution.
--------> 1. Tuition and fees.
--------> 2. Books, supplies, and equipment.
Here's one expense class where they must be required

2. The purchase of computer technology, equipment, or Internet access and related services if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)

3. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution.

Neither class 2 or 3 above mention the possible requirements of being required or incurred while enrolled

4. Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
This one you need to be enrolled
So you see, each subpoint clearly states the possible requirements for that type of expense being qualified. Point #2 about computers does not have any requirements, so there's no reason to think there should be one.
No excuses, no regrets.
Brody
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Re: Tapping 529 Plan

Post by Brody »

I am sure that I'm correct.


Look at the first sentence that you quoted.
Pub 970 wrote:
Qualified education expenses. These are expenses related to enrollment or attendance at an eligible educational institution


One can't have a qualified education expense if they are not enrolled or attending an eligible education institution. A computer will always be eligible IF a person is attending an eligible education institution.
I am the poster formerly known as Oneanddone.
xerty24
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Re: Tapping 529 Plan

Post by xerty24 »

Brody wrote:
Pub 970 wrote:
Qualified education expenses. These are expenses related to enrollment or attendance at an eligible educational institution


One can't have a qualified education expense if they are not enrolled or attending an eligible education institution. A computer will always be eligible IF a person is attending an eligible education institution.
Why do you think "expenses related to enrollment or attendance" have to be incurred after enrollment? The point #2 doesn't say "must be enrolled half time" or anything like that, and so I think there's a good reason to believe that it's not required (since they specified it elsewhere when they meant to require that). Similarly, if you look at the language regarding computers it says "purchases... if it is to be used by the beneficiary... during any of the years the beneficiary is enrolled". This means it isn't presently used, but will be used in the future while the student is enrolled. I'm not seeing how you can read this to require that the purchase happen in a year they are actually enrolled, because it just doesn't say that. Now my interpretation could lead to a tricky situation where you buy the computer this year, take the 529 money as qualified, but then you kid decides to become a musician instead of going to college. Presumably in such a situation you'd need to amend the prior year return to reflect the taxability of the withdraw, which at the time, was thought not to be.

I'm not saying you're wrong, but I'm not convinced that what it says in Pub 970 requires one to take the position you're taking.
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Brody
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Re: Tapping 529 Plan

Post by Brody »

Why do you think "expenses related to enrollment or attendance" have to be incurred after enrollment?
I don't think that. They can be incurred before hand, but they must be in the same calendar year.

I am 100% sure that I am correct regardless of the language of publication 970.
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xerty24
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Re: Tapping 529 Plan

Post by xerty24 »

This is what we get for not reading the actual Code.
Brody wrote:It does not matter if a computer is required or not for it to be a qualified expense. Computers are EXPLICITLY a qualified expense.
Sadly, no - computer expenses were qualified for 2009 and 2010 only, as you can read for yourself in 529(e)(3)(A)(iii):

http://www.law.cornell.edu/uscode/usc_s ... -000-.html
expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment...
And while HR 529 would permanently extend those, as well as provide other 529-related tax incentives, that bill is stalled in committee and has not yet been passed. Here's the details on that proposed law:

http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.529:
No excuses, no regrets.
Brody
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Re: Tapping 529 Plan

Post by Brody »

Thanks, Xerty. I was not aware that it wasn't/hasn't been extended.

I would think, however, that most schools would require it and/or it isn't something that the IRS will bother challenging since it is pretty obvious that one can't go to college without having a computer.
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Penguin
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Re: Tapping 529 Plan

Post by Penguin »

xerty24 wrote:This is what we get for not reading the actual Code.
Brody wrote:It does not matter if a computer is required or not for it to be a qualified expense. Computers are EXPLICITLY a qualified expense.
Sadly, no - computer expenses were qualified for 2009 and 2010 only, as you can read for yourself in 529(e)(3)(A)(iii):

http://www.law.cornell.edu/uscode/usc_s ... -000-.html
expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment...
And while HR 529 would permanently extend those, as well as provide other 529-related tax incentives, that bill is stalled in committee and has not yet been passed. Here's the details on that proposed law:

http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.529:
Special thanks to you, xerty, for finding both the actual Code and pending legislation. Can you give me a hint on how I might be able to discover the actual Code and pending legislation for myself in the future? I have always relied on IRS publications, but now I realize that may not always be complete or unambiguous.
Jon
xerty24
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Re: Tapping 529 Plan

Post by xerty24 »

Penguin wrote:Special thanks to you, xerty, for finding both the actual Code and pending legislation. Can you give me a hint on how I might be able to discover the actual Code and pending legislation for myself in the future?
Your welcome - I don't normally do this, but this is what tax lawyers do and if you're going to play one on the Internet you need to be willing to go to the horse's mouth. I find the Cornell Law site pretty good for looking up the text of the law (and free), but you sometimes have to watch for subsequent revisions. The Cornell site was in the top half a dozen hits for my search: IRC "qualfied tuition program" (IRC = internal revenue code). As for the pending legislation, I just googled for "529 computer expenses 2011" once I thought there might be an issue and read enough discussion on the subject to convince myself about the current state of the law. Vanguard had an article warning 529 participants about the change in eligible expenses for 2011 for example.
I have always relied on IRS publications, but now I realize that may not always be complete or unambiguous.
It's worse than that - sometimes they're wrong, or suggest things that aren't written in the law. Just like the IRS phone reps, the Pubs are not the law and can't be relied on (officially). They do make for pretty good plausible deniability though, if you take a more favorable position than the Code allows based on inaccurate presentation of the rules in a IRS Publication.
No excuses, no regrets.
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