529/coverdells/ ibonds for college

[JBTX]

18 year starting state school college next year. roughly $75k, of which $50k is 529 and $25k coverdell.

- when paying eligible expenses, do you have to pay out of 529 or coverdell, or can you just reimburse yourself? If reimburse, how long do you have to reimburse? Are the rules the same or different for coverdell?

- does it make any difference which you deplete first?

- I just bought her a MacBook. Can/should I reimburse myself for that? Used $800 of rewards gift cards so I assume that portion can't be reimbursed

My guess is the $75k will last between 2 and 3 years. Of course there is always the chance that she doesn't complete college.

I also have some ibonds that I may use some after the 529 and coverdell are depleted. Our MAGI is and will likely be over the amount that allows interest exclusion from taxes. Does anybody have any suggestions how to most efficiently liquidate those? I saw in another thread you can roll them into 529 which gives more flexibility on how you spend it, but if we don't get interest exclusion I'm not sure there is any point to that.

[ccieemeritus]

Coverdell can be used until age 30. 529 forever (and passed on to grandkids). So I took money out of Coverdell first. But if you expect both to be exhausted it doesn't matter much. Coverdells have more investment options but since we're Bogleheads investing in index funds that doesn't matter much.

I usually just pay the bills to the schools myself. Around October/November I total up all the "eligible expenses" and reimburse myself by distributing from the Coverdell to myself. This makes it easier to be "sure" the money got to the right place. But I keep a spreadsheet of all eligible education expenses and screenshots of receipts/invoices/housing fees to respond to the letter the IRS is likely to send me (I think I got one of those over the years).

IT IS VERY IMPORTANT TO GET REIMBURSED THE SAME CALENDAR YEAR AS THE EXPENSE. I never wait until December...if something gets messed up you can fix it if its not too late.

With CA Scholarshare, there is a way to directly pay some schools (including UCSD, where DD was at the time). I think I used that once (successfully). But when small fees come in once per month that's a pain in the neck.

The "official" IRS documentation on qualified education expenses is https://www.irs.gov/pub/irs-pdf/p970.pdf Each type of tuition program has a "what expenses qualify" section. Regarding computer it includes:

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)

I don't think it matters how you pay for the computer. Just that you paid and they are using it for college (and have the receipt). I would only claim it if I paid for it in the same calendar year that a student was in college.

[JBTX]

Coverdell can be used until age 30. 529 forever (and passed on to grandkids). So I took money out of Coverdell first. But if you expect both to be exhausted it doesn't matter much. Coverdells have more investment options but since we're Bogleheads investing in index funds that doesn't matter much.

I usually just pay the bills to the schools myself. Around October/November I total up all the "eligible expenses" and reimburse myself by distributing from the Coverdell to myself. This makes it easier to be "sure" the money got to the right place. But I keep a spreadsheet of all eligible education expenses and screenshots of receipts/invoices/housing fees to respond to the letter the IRS is likely to send me (I think I got one of those over the years).

IT IS VERY IMPORTANT TO GET REIMBURSED THE SAME CALENDAR YEAR AS THE EXPENSE. I never wait until December...if something gets messed up you can fix it if its not too late.

With CA Scholarshare, there is a way to directly pay some schools (including UCSD, where DD was at the time). I think I used that once (successfully). But when small fees come in once per month that's a pain in the neck.

The "official" IRS documentation on qualified education expenses is https://www.irs.gov/pub/irs-pdf/p970.pdf Each type of tuition program has a "what expenses qualify" section. Regarding computer it includes:

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)

I don't think it matters how you pay for the computer. Just that you paid and they are using it for college (and have the receipt). I would only claim it if I paid for it in the same calendar year that a student was in college.

Thanks. This is very helpful!

Are the criteria for what qualifies as educational expenses the same for 529 and coverdell?

[KlangFool]

OP,

I assume that you know that you need to pay enough out of your own pocket in order to qualify for AOTC. I do not know whether coverdells/ibonds cut into that number or not.

https://www.irs.gov/credits-deductions/individuals/aotc

KlangFool

[SimonJester]

Thanks. This is very helpful!

Are the criteria for what qualifies as educational expenses the same for 529 and coverdell?

The verbiage in Pub 970 for ESA and QTP (529) is the same for Qualified Higher Education Expenses. One difference you can use the ESA to contribute towards the 529 and count that as an eligible expense.

I am depleting the kids ESA first before touching the 529. The reason the ESA must be used by age 30 and the ESA money legally belongs to the dependent vs 529 I still own. So if the kid drops out of college they have spent their money first...

I did not end up reimbursing myself for their laptop purchases as I believe their ESA & 529 will be exhausted.

As Klangfool pointed out make sure you take into account the AOTC which funds must be paid out from NON 529 / ESA dollars.

I-bonds, You can claim the tax exemption (assuming you qualify) however this complicates things with AOTC. However if you are contributing to the 529 you can use THAT contribution as the qualified expense for the I-Bond exemption and then you do not have to worry about calculating the exemption into the AOTC.

Welcome to the club, aint paying for college fun... Have you started looking at all the various fees colleges are taking into the bill yet? My oldest paid two different fees to have his English papers graded... Gota love it.

[JBTX]

Thanks. This is very helpful!

Are the criteria for what qualifies as educational expenses the same for 529 and coverdell?

The verbiage in Pub 970 for ESA and QTP (529) is the same for Qualified Higher Education Expenses. One difference you can use the ESA to contribute towards the 529 and count that as an eligible expense.

I am depleting the kids ESA first before touching the 529. The reason the ESA must be used by age 30 and the ESA money legally belongs to the dependent vs 529 I still own. So if the kid drops out of college they have spent their money first...

I did not end up reimbursing myself for their laptop purchases as I believe their ESA & 529 will be exhausted.

As Klangfool pointed out make sure you take into account the AOTC which funds must be paid out from NON 529 / ESA dollars.

I-bonds, You can claim the tax exemption (assuming you qualify) however this complicates things with AOTC. However if you are contributing to the 529 you can use THAT contribution as the qualified expense for the I-Bond exemption and then you do not have to worry about calculating the exemption into the AOTC.

Welcome to the club, aint paying for college fun... Have you started looking at all the various fees colleges are taking into the bill yet? My oldest paid two different fees to have his English papers graded... Gota love it.

Thanks. Good info. I'll definitely deplete the ESA first. I doubt AOTC will come into play due to MAGI limits but it's good to know in case our situation changes.

[dszklarek]

Thanks. This is very helpful!

As Klangfool pointed out make sure you take into account the AOTC which funds must be paid out from NON 529 / ESA dollars.

I-bonds, You can claim the tax exemption (assuming you qualify) however this complicates things with AOTC. However if you are contributing to the 529 you can use THAT contribution as the qualified expense for the I-Bond exemption and then you do not have to worry about calculating the exemption into the AOTC.

Can you explain what you mean by this please. I paid the 4k for the AOTC last year. I pay for all the other expenses with 529. Next year I am considering using some ibonds so I can cash them and rebuy with better rates, but I dont understand the rules or what you mean by using the 529 contribution as the qualified expends for the ibond exemption.

[SimonJester]

Thanks. This is very helpful!

As Klangfool pointed out make sure you take into account the AOTC which funds must be paid out from NON 529 / ESA dollars.

I-bonds, You can claim the tax exemption (assuming you qualify) however this complicates things with AOTC. However if you are contributing to the 529 you can use THAT contribution as the qualified expense for the I-Bond exemption and then you do not have to worry about calculating the exemption into the AOTC.

Can you explain what you mean by this please. I paid the 4k for the AOTC last year. I pay for all the other expenses with 529. Next year I am considering using some ibonds so I can cash them and rebuy with better rates, but I dont understand the rules or what you mean by using the 529 contribution as the qualified expends for the ibond exemption.

First assuming you meet the income limits, Age requirement you can exclude the interest from the I-bonds as income via IRS Form 8815.

Lets say you cash in a $1,000 I-Bond worth $1,200. You would normally be taxed on that $200 of interest. So you want to use that for education, great. Now if you plan on claiming AOTC you could not use that $200 of interest in for towards the 4K of AOTC expenses.

Ok so one way to deal with this as long as you contributed $1,200 towards your 529 in the calendar year you can exclude the $200 interest from the I-Bond. Again assuming you meet the income, age filing status...

From PUB 970 again
Qualified education expenses:
2) Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8).