The COVID-19 pandemic has caused many educational institutions to move students out of campus housing and switch to an online curriculum or to cancel classes altogether. As such, students may be receiving partial or complete reimbursements for spring 2020 tuition, room and board charges, or other fees. Many individuals and families who had paid for qualified education expenses with 529 plans may be left wondering what to do with the reimbursed funds to avoid unnecessary income taxation.
Generally, if a qualified educational institution (private primary or secondary school, college, or university) issues a refund of tuition, room and board charges, or other fees that were paid for with 529 plan funds, beneficiaries will not be required to pay taxes or penalties on the distribution if they return the money to their 529 plan within 60 days of the date they receive the refund. Recent IRS guidance related to the CARES Act has clarified that while the 60-day window will still apply, a beneficiary who received a refund on or after February 1, 2020 will now have until July 15, 2020 to return the refund to his or her 529 plan. The amount returned cannot exceed the refunded amount, and any excess amount deposited will be considered a new contribution. The refund must be deposited back into a 529 plan for the same beneficiary. If the refund is not deposited back into the 529 plan, it will be considered a non-qualified distribution, and the earnings portion of the non-qualified distribution will be subject to income taxes at the beneficiary’s tax rate and a 10% tax penalty.
Beneficiaries and account owners should thoroughly document all transactions associated with 529 college savings plans to avoid unnecessary tax consequences and penalties. Those impacted should contact their 529 college savings plan provider to learn the steps required to deposit refunds back into their account.
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The opinions expressed in this article are as of the date issued and subject to change at any time. Nothing contained herein is intended to constitute investment, legal, tax or accounting advice, and clients should discuss any proposed arrangement or transaction with their investment, legal or tax advisers.