topic GI Bill and 529 Distribution in Education

GI Bill and 529 Distribution

Anonymous — Wed, 11 Feb 2026 04:09:45 GMT

My son used the GI Bill this last semester. The cost of attendance at the school is showing as $10138 per semester.

The GI Bill paid the tuition and fees in full and he received $10680.11 for his housing and books allowance for the fall semester.

We withdrew $5000 in 529 funds with the earning portion being $3284.85. Do we owe penalties and taxes on the entire earnings in the 529 distribution?

Re: GI Bill and 529 Distribution

Hal_Al — Wed, 07 Feb 2024 23:02:40 GMT

You owe tax on the entire earnings, but no penalty. You owe the tax because he had no expenses that were not covered by tax free benefits, unless his housing, food* and books (including a computer) was more than the $10,680 he received. There is no penalty because receiving tax free benefits, for expenses that woulda been paid by the 529 plan, is a penalty exception.

*Room and board (R&B) (housing & food) are qualified expenses for a 529 distribution but the amount you can claim is limited to the lesser of your actual cost or the school's R&B “allowance for cost of attendance”.

Q. How to enter in TurboTax (TT)?

A. Enter the 1099-Q. When asked who the student is answer: someone else not listed here, even if he is still your dependent (lying to TurboTax to get it to do what you want does not constitute lying to the IRS). Enter the student's name when asked. A few screens later, you'll get one simple screen to enter expenses. Press Done at the 1099-Q summary screen, to get there. Also enter the amount of the GI benefits in the box "Tax-free assistance" (actually you only need to enter $5000 in the room & board box and $5000 in the tax free assistance box) This reports the earnings as taxable and claims the scholarship exception. You do not have to deal with the complicated “Educational expenses and Scholarships” (1098-T) section later. TT will prepare form 5329 to claim the penalty exception.

Re: GI Bill and 529 Distribution

Anonymous — Fri, 09 Feb 2024 22:02:25 GMT

Thank you for your assistance.

Re: GI Bill and 529 Distribution

KrisD15 — Fri, 09 Feb 2024 22:17:39 GMT

This may or may not be useful advice but going forward, if the student is a beneficiary of a 529 plan and that savings may not be needed because of the GI Bill, you might consider rolling the funds from the 529 Plan into a Roth IRA.

This is a new option starting this year 2024 as part of the Secure 2.0 Act.

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