Withdrawing 529 $ without penalty [what counts as a "scholarship"]

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Admiral Fun
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Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Admiral Fun » Tue Oct 15, 2019 8:42 pm

Due to the generosity of grandparents our kids have solid balances in their 529 plans.

It is possible, however, that they will not need all the money. I now work at a University that provides a tuition benefit for children and has other options for tuition exchange and tuition credits at other institutions.

If there is money left over, I know that the best option is probably to just leave the money there for possible graduate school or perhaps grandkids.

But I'd like to at least explore a few alternatives. Questions...
1. Do the above benefits count as "scholarships"?
2. If yes, would I be able to withdraw the amount equal to the "tuition benefit", pay tax on it (but not the 10% penalty), and then contribute the money to my kid's Roth IRA if she has taxable income?
3. If yes, would it be even better to put the 529 plan in her name could she do the same? (and then pay less tax since she would be in a lower bracket).

Thanks!

Grt2bOutdoors
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Grt2bOutdoors » Wed Oct 16, 2019 10:44 am

Admiral Fun wrote:
Tue Oct 15, 2019 8:42 pm
Due to the generosity of grandparents our kids have solid balances in their 529 plans.

It is possible, however, that they will not need all the money. I now work at a University that provides a tuition benefit for children and has other options for tuition exchange and tuition credits at other institutions.

If there is money left over, I know that the best option is probably to just leave the money there for possible graduate school or perhaps grandkids.

But I'd like to at least explore a few alternatives. Questions...
1. Do the above benefits count as "scholarships"?
2. If yes, would I be able to withdraw the amount equal to the "tuition benefit", pay tax on it (but not the 10% penalty), and then contribute the money to my kid's Roth IRA if she has taxable income?
3. If yes, would it be even better to put the 529 plan in her name could she do the same? (and then pay less tax since she would be in a lower bracket).

Thanks!
Are the children receiving a letter from the University indicating they are the beneficiaries of a scholarship? You should ask the University you currently work at how this benefit works. To me, it sounds like a "perk" or "fringe benefit" conditional upon your continued employment with the University and could be considered a part of deferred compensation and NOT as a scholarship. So to answer question 1 and the subsequent questions, you really need to talk to your Human Resources department and potentially, the Financial Aid office too!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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RickBoglehead
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by RickBoglehead » Wed Oct 16, 2019 10:48 am

Nailed it.
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Admiral Fun
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Admiral Fun » Wed Oct 16, 2019 11:44 am

Thanks all.

Digging a little deeper, it appears that any "tax-free educational assistance" may count toward penalty-free withdraws from 529 plans. According to Fidelity: "Examples include Pell grants, tax-free scholarships and fellowships, tuition discounts, the Veteran's Educational Assistance Program, and tax-free employer educational assistance programs."

It's not clear whether it matters whether the "tax-free employer educational assistance program" is my employer or her employer.

I'll do some additional digging with Financial Aid and HR and see what I can find. However, I've noticed that no one wants to give tax advice, so I'm skeptical that someone at my institution will tell me definitively.

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RickBoglehead
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by RickBoglehead » Wed Oct 16, 2019 11:48 am

This seems to say no, but as says no clear determination. Thousands have dealt with this issue, I cannot imagine your school doesn't have some guidance.

https://forum.savingforcollege.com/t/52 ... ns/11717/5
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by getthatmarshmallow » Wed Oct 16, 2019 3:52 pm

Admiral Fun wrote:
Wed Oct 16, 2019 11:44 am
Thanks all.

Digging a little deeper, it appears that any "tax-free educational assistance" may count toward penalty-free withdraws from 529 plans. According to Fidelity: "Examples include Pell grants, tax-free scholarships and fellowships, tuition discounts, the Veteran's Educational Assistance Program, and tax-free employer educational assistance programs."

It's not clear whether it matters whether the "tax-free employer educational assistance program" is my employer or her employer.

I'll do some additional digging with Financial Aid and HR and see what I can find. However, I've noticed that no one wants to give tax advice, so I'm skeptical that someone at my institution will tell me definitively.
Talk to your HR people. If your tuition benefit is taxable (mine counts as imputed income if it's used for children), then it seems it wouldn't count as a scholarship. They should be at least able to tell you how they treat it taxwise.

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Admiral Fun
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Admiral Fun » Wed Oct 16, 2019 5:59 pm

RickBoglehead wrote:
Wed Oct 16, 2019 11:48 am
This seems to say no, but as says no clear determination. Thousands have dealt with this issue, I cannot imagine your school doesn't have some guidance.
https://forum.savingforcollege.com/t/52 ... ns/11717/5
getthatmarshmallow wrote:
Wed Oct 16, 2019 3:52 pm
Talk to your HR people. If your tuition benefit is taxable (mine counts as imputed income if it's used for children), then it seems it wouldn't count as a scholarship. They should be at least able to tell you how they treat it taxwise.
I talked to the head of HR. They said that the tuition benefits are "non-taxable education payments". They would not comment as to whether it would count as a scholarship with respect to 529 plans. I may try financial aid next. Not sure if I'm going to get a definitive answer.

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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Grt2bOutdoors » Wed Oct 16, 2019 8:17 pm

Admiral Fun wrote:
Wed Oct 16, 2019 5:59 pm
RickBoglehead wrote:
Wed Oct 16, 2019 11:48 am
This seems to say no, but as says no clear determination. Thousands have dealt with this issue, I cannot imagine your school doesn't have some guidance.
https://forum.savingforcollege.com/t/52 ... ns/11717/5
getthatmarshmallow wrote:
Wed Oct 16, 2019 3:52 pm
Talk to your HR people. If your tuition benefit is taxable (mine counts as imputed income if it's used for children), then it seems it wouldn't count as a scholarship. They should be at least able to tell you how they treat it taxwise.
I talked to the head of HR. They said that the tuition benefits are "non-taxable education payments". They would not comment as to whether it would count as a scholarship with respect to 529 plans. I may try financial aid next. Not sure if I'm going to get a definitive answer.
This is from the link above:

From IRS Pub 15-B (2017), From IRS Pub 15-B (2017): If you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. Working condition benefits may be excluded from wages. Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense.
...
Working Condition Benefits
This exclusion applies to property and services you provide to an employee so that the employee can perform his or her job. It applies to the extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid for it. The employee must meet any substantiation requirements that apply to the deduction. Examples of working condition benefits include an employee's use of a company car for business, an employer-provided cell phone provided primarily for noncompensatory business purposes, and job-related education provided to an employee.
...
This exclusion also applies to a cash payment you provide for an employee's expenses for a specific or prearranged business activity for which a deduction is otherwise allowable to the employee. You must require the employee to verify that the payment is actually used for those expenses and to return any unused part of the payment.

It seems that is is a working condition benefit which is why the head of HR said it's a "non-taxable education payment". I think if you try to say your kid received a scholarship, you are really stretching. I don't know how the IRS will know, other than those who receive scholarships are reported to the IRS with a taxpayer id number for the recipient and that of the payor (school). Otherwise, how will the IRS know what is exempt and what is not?
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Ken Reckers
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Ken Reckers » Wed Oct 16, 2019 11:09 pm

I work at College X. My daughter goes to College Y and receives a Tuition Exchange scholarship. Every year, she receives a 1098-T from College Y. Box 5 "Scholarships or grants" includes the full amount of the Tuition Exchange scholarship.

Financial Aid Office will be of more help than HR, almost certainly.

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Admiral Fun
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Admiral Fun » Sun Nov 17, 2019 10:11 am

Let's say I wanted to fund some college related expenses that are non-qualified (e.g. transportation).

Let's further say that our daughter received a scholarship of $2100. I then transferred $2100 of the 529 to her name. She then uses the $2100 for non-qualified expenses, but would not be subject to the kiddie tax because it's below the threshold.

Do I have this right? Is this viable process for withdrawing a small amount of the 529 funds penalty and tax free?

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tadamsmar
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by tadamsmar » Sun Nov 17, 2019 10:27 am

Here's a turbo tax thread that seems to cover this question:

https://ttlc.intuit.com/community/colle ... /00/784358

Spirit Rider
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Spirit Rider » Sun Nov 17, 2019 11:50 am

Admiral Fun wrote:
Sun Nov 17, 2019 10:11 am
Let's say I wanted to fund some college related expenses that are non-qualified (e.g. transportation).

Let's further say that our daughter received a scholarship of $2100. I then transferred $2100 of the 529 to her name. She then uses the $2100 for non-qualified expenses, but would not be subject to the kiddie tax because it's below the threshold.

Do I have this right? Is this viable process for withdrawing a small amount of the 529 funds penalty and tax free?
It is unnecessary to transfer any 529 assets to a 529 in her name. Non-qualified 529 distributions to the beneficiary are taxable to the beneficiary.

Keep in mind that such a 529 non-qualified distribution is considered unearned income subject to ordinary income Kiddie Taxes.

In 2019 her unearned income standard deduction will be $1100 if she has no earned income, $350 if her earned income is >= $750 and $0 if it is >= $12,200. The amount of the standard deduction will be tax-free.

$2200 minus the above standard deductions will be taxable at the dependent's rate of 10%. The remainder will be taxed a trust rates. The next $2600 will be taxed at a 10% rate.

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Admiral Fun
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Re: Withdrawing 529 $ without penalty [what counts as a "scholarship"]

Post by Admiral Fun » Sun Nov 17, 2019 4:45 pm

Spirit Rider wrote:
Sun Nov 17, 2019 11:50 am
It is unnecessary to transfer any 529 assets to a 529 in her name. Non-qualified 529 distributions to the beneficiary are taxable to the beneficiary.

Keep in mind that such a 529 non-qualified distribution is considered unearned income subject to ordinary income Kiddie Taxes.

In 2019 her unearned income standard deduction will be $1100 if she has no earned income, $350 if her earned income is >= $750 and $0 if it is >= $12,200. The amount of the standard deduction will be tax-free.

$2200 minus the above standard deductions will be taxable at the dependent's rate of 10%. The remainder will be taxed a trust rates. The next $2600 will be taxed at a 10% rate.
This is very helpful - thanks.

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