Could excess 529 distribution be reversed?

[BK2000]

CA ScholarShare 529 - entering college this fall and educating myself on 529 distribution strategies.  I understand that if a college issues a tuition refund for a dropped class for example, that amount can be re-contributed back to the 529 plan.

(a) Can this refund go back to the original plan or it must be a new one?

(b) What if "I" make a calculation mistake and withdraw more than the qualified expenses - can I re-contribute it back?

TIA

[Hal_Al · Accepted solution]

Q. I understand that if a college issues a tuition refund for a dropped class for example, that amount can be re-contributed back to the 529 plan?

A.  Correct. But it must be done within 60 days of receiving the refund.

Q.  Can this refund go back to the original plan or it must be a new one?

A. Either. 

Q.  What if "I" make a calculation mistake and withdraw more than the qualified expenses - can I re-contribute it back?

A. Yes, but it must be done within 60 days of taking it out (or from the date of a refund).  A "re-contribution" is technically classified a s a refund.  

You may use an excess distribution for expenses, later in the same calendar year. So, for example, you over withdraw for the Spring term, you can count that money for Fall expenses.  The opposite is not true. If you over withdraw for the Fall term, you cannot use that money to pay for expenses in the Spring of the following year.  To be "qualified", withdrawals (distributions) must be in the same calendar year that expenses were paid.   So, if you paid for Spring 2022 expenses in December 2021, that could be counted for a 2021 529 plan distribution. 

[BK2000]

Thank you @Hal_Al ,

I am clear on your response.  So if I were to summarize and over-simply it: One should do their best to plan and calculate accurately, but since we make calculated assumptions for the tax year which may be slightly off, it is okay because it can be corrected as long as it is within the guidelines (i.e. 60-days).

[Hal_Al]

Yes.

[anonymouse1]

How is this recontribution done?  What do you do about the 1099-Q?  For example, in IRS Pub 970 there is an example where the student had $5200 in QHEE after a scholarship, but she took $5300 from her 529.  She calculated the earnings on that extra $100 (it was $18) and claimed it as income because it was an nonqualified distribution.  But if she sent that $100 back to the custodian, and they counted it as a new contribution and kept the $5300 on the 1099-Q, would she just subtract the $100 "contribution" and not claim any nonqualified distribution?  Or would the custodian be required to issue a corrected 1099-Q?

[Hal_Al]

Q. How is this recontribution done? 

A. Contact the ustodian for instructions.

Q. What do you do about the 1099-Q? 

A. The 1099-Q is only an informational documents The numbers on it is not required to be entered onto your (or your tax return. Report the taxable portion, if any, based on your own records.

Q. Would the custodian be required to issue a corrected 1099-Q?

A. No.  If the recontribution is made in the same calendar year, it will most likely be reflected on the 1099-Q.  If it isn't, you report it on your taxes based on your own records. In the example, none of the distribution would be non qualified.