Q. Do we have to make the payment THIS YEAR . . . 2023 . . . to be able to use the 529 money AND to make it a tax free distribution?
A. No.
Q. Do I need to hurry and get out the last loan money while it's still 2023 so it can be a tax-free distribution to pay off a loan?
A. No. The only timing requirement is that the distribution be in the same year that the loan payment was made. So if the loan payment will be made in 2024, you want to take the 529 distribution in 2024.
You mention that the 529 beneficiaries are a sibling and a cousin. A sibling's 529 plan can be used to pay a loan, but not a cousin's.
As a side issue, the beneficiary of a 529 plan can be changed to a first cousin.
