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Refund of Room and Board that was paid with a 529 plan. What do I do with the money?

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[UPDATED] The IRS released Notice 2020-23 which extends the deadline for returning refunds to the 529 plan for taxpayers impacted by COVID-19. For any recontribution that has a due date between April 1 and July 15th the “60-day deadline” is automatically extended to July 15th.

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Most colleges and universities sent students home in March due to COVID-19. Now, parents are receiving refund checks from the University for room and board that was not used since the student was sent home. If you paid cash for that expense, then nothing to worry about. But, if you paid for the room and board with the 529 plan then you have to take action to avoid a taxable event.

What is a 529 plan?

529 plans (also known as Qualified Tuition Plans) are investment accounts that earn income over time. When the child is ready to go away to University, you withdraw money from the account and as long as you use the money for qualified expenses, you do not have to pay tax on the earnings (this is one of the few places in the U.S. where you get free money!)

Why is the refund check taxable?

Now that you are getting a refund check, not all the money was used for qualified expenses (since it is now in your pocket) thus the IRS (and your state) could charge you tax and penalties on that money. To avoid tax and penalties you must return that money to a 529 plan that has the same beneficiary, within 60 days of the refund, and the amount recontributed cannot be more than the refund check. (See IRS Notice 2018-58 for more information).

How do I do this?

 

To return the money to the 529 account, check with your plan administrator because they may have a specific process you must follow. Then, follow-up! to be sure that the money goes back in within 60 days. We recommend that you have a well-documented paper trail that makes it clear that the payment is a recontribution of a previous qualified distribution and be sure it is done within 60 days (have I mentioned that already?).

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