529 Help

[dried]

Hello

I found myself in a situation I'm not sure there is a resolution to. I called my administrator on 12/22/22 and let them know I'd be taking out some money the first week of January 2023 for tuition due on the 10th. They made some trades which made it a taxable event so I received a 1099Q for 14K additional money. They did not send me the money until January 2023 but I guess since they traded the funds it was taxable. Now my tax person is saying I owe an additional $4k in taxes. Is there any way I can reverse this 529 withdrawal?

Thanks,

Devon

[SharonD007]

Yes. One of the rules for 529 savings plans, is that the money must go toward covering qualified education expenses. If not, the earnings portion of any withdrawals will be subject to taxes and a 10% penalty.

In order for you to avoid the taxes you can rollover a Qualified Tuition Program (QTP) 529 Plan if you do so within 60 days of the date of the distribution. It can be rolled over to another QTP for the same beneficiary or a member of the family or to an ABLE account for the same beneficiary or a member of the family. If you are considering rolling the funds to an ABLE account, there are annual contribution limits.

For additional details, please review the IRS Pub 970 - Tax Benefits for Education.

[Edit 2/10|1:23pm PST]

@dried 

[dried]

Ok. So would I need to deposit the $14k I took in 2022 back to the account and then withdrawal it again so it shows up in 2023? My accountant told me that since the distribution was made in 2022 and I didn't have a tuition expense in 2022 to offset it, I would have to pay taxes on it in 2022. The tuition,room  and board was paid January of 2023. Thanks in advance.

[SharonD007]

Yes, you will have to deposit the total amount that you withdrew in 2022 within 60 days of the date of your distribution.  Contact your administrator to find out the process since you will need to get another distribution to cover the educational expenses in 2023.  Your accountant is correct since you did not pay for qualified educational expenses in 2022, you will pay taxes and penalties on the earnings.

For additional information, please take a look at the TurboTax article What is IRS Form 1099-Q?

[Edit 2/10|1:27 pm PST]