Capstone Wealth Partners Capstone Wealth Partners
MENUMENU
  • Our Story
  • What We Do
    • Our Process
    • Services & Pricing
  • Resources
    • Blog
    • eBooks
    • Videos
    • Events
    • Advisor Resources
  • Contact
  • Schedule a Call
Capstone Wealth Partners Capstone Wealth Partners
MENUMENU
  • Our Story
  • What We Do
    • Our Process
    • Services & Pricing
  • Resources
    • Blog
    • eBooks
    • Videos
    • Events
    • Advisor Resources
  • Contact
  • Schedule a Call

Avoiding a 529 Penalty When You Receive a Refund

By Joe Messinger, CFP®

April 16, 2020

2 min READ

Parents can use money from a 529 college savings plan to pay for qualified higher education expenses like tuition, room, and board. When used for those purposes, the money earns interest tax free. If the money is not used for a qualified college expense, the account owner is subject to income taxes plus a 10% penalty fee on the gains you earned. Usually colleges are not refunding money back to a family (unless a course is dropped). However in these times of COVID-19, many colleges are refunding pro-rated room and board funds back to families. If you used a 529 plan to pay for these amounts, what can you do to avoid a 529 penalty?

The first option is to use the money for an upcoming qualified expense during the same calendar year.

If you received a refund during this spring semester, use that money for tuition (or room and board, etc.) in the fall. However, watch that calendar. If you received the money in 2020, you must spend it before 1/1/2021.

Another option is to recontribute the money back into your 529 plan.

Each plan will be a bit different so visit their website for accurate instructions. (Here are the specifics from Ohio’s 529 Advantage plan.) In general though, this recontribution MUST occur within 60 days of issuance of the refund (not the day you received the refund–the date the refund was issued).

You, the account owner, must send in a check to the 529 plan for the refunded/recontributed amount. By sending a check, you have a nice and neat paper trail for tax purposes.

You will need to include a letter of instruction for the folks at the 529 saying that this check is a recontribution of refunded 529 money used to pay for qualified expenses earlier in the year and not a new deposit. A good practice would be to include as many details in the letter as possible: the amount being recontributed, when was the refund issued, and the name of the institution.

On both the check and in the letter, be sure to include your child’s name and account number.

Be sure to save all receipts.

You will have to provide a paper trail of how the money was spent or re-contributed if a question arises with the IRS. Be sure to consult a tax professional if you need additional personal guidance regarding tax implications.

A few extra steps can protect you from an unexpected 529 penalty.

 

Joe Messinger, CFP®

Author

Joe Messinger, CFP®
Joe is a leading authority on late-stage college funding. He frequently speaks to organizations and parent groups such as BMI Credit Union, Westerville City Schools, At the Core, CollegeWire, and I Know I Can, among others. He is also a highly regarded thought leader in the financial planning community. He is frequently asked to speak at industry conferences about his College Pre-Approval™ process providing Continued Education for CPA’s and CFP® through through the FPA, XYPN, and OSCPA and has been published in the Journal for Financial Planning.

SHARE:

  • Facebook
  • Twitter
  • LinkedIn

RELATED ARTICLES

A Quick Guide To The Financial Aid Appeals Process Thumbnail

College Planning

A Quick Guide To The Financial Aid Appeals Process

Joe Messinger, CFP®

March 23, 2023

  1204 Views
Choosing a College: Weighing the Return on Education Thumbnail

College Planning

Choosing a College: Weighing the Return on Education

Joe Messinger, CFP®

March 17, 2023

  2136 Views
Why Reaching Out to a College Planning Advisor with Financial Aid Appeals is a Good Idea Thumbnail

College Planning

Why Reaching Out to a College Planning Advisor with Financial Aid Appeals is a Good Idea

Joe Messinger, CFP®

March 10, 2023

  1335 Views
Appealing the Financial Aid Award Letter Thumbnail

College Planning

Appealing the Financial Aid Award Letter

Joe Messinger, CFP®

March 3, 2023

  8517 Views
College-Money-Report

Get the Free College Money Report – customized for you – and know before you go!

Get My Report

No spam, guaranteed.
Please read our Privacy Policy.

ABOUT OUR BLOG:

Capstone Wealth Partners is a fee-only independent Registered Investment Advisor in Columbus, Ohio. We are financial planners for college-bound families

The Capstone Blog offers up our best ideas on how to save and pay for college, all while staying on track for a confident retirement.

FILTER BY CATEGORY:

  • College
  • College Planning
  • Financial Planning
  • In The News
  • Investing
  • Retirement
  • Tax Planning

FOLLOW US:

 

Capstone Wealth Management Logo

GET IN TOUCH

The Millennium
6037 Frantz Road
Suite 104
Dublin, Ohio 43017

(614) 754-7805

Book Joe to Speak

UPCOMING EVENTS

  • There are no upcoming events.

FOLLOW US

 
Client Corner
© 2023 Capstone Wealth Partners
  • Privacy Policy
  • Form ADV
  • Advisor Resources
  • Accessibility Feedback