529 distribution

[caijian01]

Son 1 is in graduate school; paid spring term tuition with student loan.

Son 2 is entering college in fall, got a full ride.

We moved money from Son2's 529 to Son1's 529 to pay Son1's school expense. Can I withdrawal Son1's whole year expenses tax free or just fall term expenses?

[K M W]

Funds can be withdrawn from a 529 plan tax free, provided the funds are used for qualified education expenses at a qualified educational institution.  Distributions can be used for graduate school as well as undergraduate expenses.

You mentioned that Son 1 used a student loan to pay for the spring semester.  Keep in mind that student loans can be used for a range of costs related to higher education - more than just tuition, room and board.  So to maximize the amount of tax-free distributions allowed from the 529 plan, you will want to allocate as much of the student loan funds to expenses that are eligible expenses for student loan proceeds but not eligible expenses for 529 tax-free distributions.

I recommend consulting the student loan paperwork to determine what those funds can be used on or seek assistance from the college financial aid office to make sure you are in compliance with any loan requirements - and then back into how much expenses remain that are eligible for the use of the 529 plan funds to calculate the correct amount to withdraw from the 529 plan for all the 2024 qualified expenses.

[BettieG]

Withdrawing your 529 funds for the entire year’s expenses, rather than just the Fall term, would be risky.  In order to be a qualified withdrawal (i.e., not taxed), you must submit your request for the cash in the same calendar year, not the same academic year, you make the payment to the school.  In order be a qualified withdrawal therefore, you must withdraw the money in the same calendar year that you use it to pay qualified expenses.  You should not then take a withdrawal to cover second semester expenses in this calendar year, unless you plan to actually pay the tuition in this calendar year.

This article may be helpful to you:  Information on 529 Plans

I hope this helps.

[caijian01]

Good point. However, 529 distribution only related to 1090-Q and 1090-T. Student loan is not in any part of tax return for my son1 since he is still in school. 

[caijian01]

They are in the same calendar year. We will have 1090-Q and 1090-T to back them up. Since student loan is not reported in son's tax return. Why will IRS care?

[LenaH]

You can report the expenses you paid in the tax year for that year and/or the first three months of the following year. Your 1098-T, however, may not reflect the same amount in Box 1. In that case, you would click "This is not what I paid to this school" when entering 1098-T and instead enter the amount of tuition paid. My suggestion is to keep good records of what you pay each year for tuition. 

@caijian01