I am the owner of a 529 account for my beneficiary daughter, who has graduated from college in 2020 and is no longer a dependent. She has student loans in her name to pay off (deferred during COVID), and we want to use the 529 funds to pay the loans. The question is, should the 529 payments be made to me (the owner) or to my daughter (the beneficiary). And then who should make the loan payments?
On the EdVest 529 website to make a withdrawal, if you select that you are using the money for a student loan payment, the distribution can ONLY be made to the owner. If you select that is being used for a qualified educational expense (in this case, a student loan payment), it lets you choose the owner OR or beneficiary. Very confusing. When I called EdVest, they said the owner must take the distribution because of the tax laws.
So, is this true? Must the OWNER take the 529 distribution AND make the loan payments?
Q. The question is, should the 529 payments be made to me (the owner) or to my daughter (the beneficiary)?
A. It doesn't matter. Either the owner or the beneficiary can be the recipient of a distribution, even when it's for a loan.
Q. And then who should make the loan payments?
A. It doesn't matter. All that matters is that a loan payment was made in the same year that a 529 distribution was taken. The 1099-Q will go on the recipient's tax return (technically, it doesn't even need to be reported, if it is a qualified distribution).
Q. When I called EdVest, they said the owner must take the distribution because of the tax laws. So, is this true?
A. No. It sounds like it's just EdVest's policy (maybe because sibling loans are also eligible). Since it doesn't matter, just go along.
Q. Must the OWNER take the 529 distribution AND make the loan payments?
A. No, as stated earlier. You can pay the loan or give the money to the kid to pay it. You can even keep the money for yourself. All that's required, for it to be a qualified distribution, is that a qualified loan payment, in that amount, was made.