As Coronavirus spread through the United States, what should have been the spring semester for college students was suddenly upended. In many cases students were told to pack up and leave as campuses were closed, and in nearly every college, classes were either canceled or moved online.
The world really turned upside down when some colleges and universities started giving money back to students in the form of refunds for tuition, room and board charges, or other fees paid.
As students receive refunds, and the calls for more universities to issue refunds grow, more students and guardians are starting to ask the question; what do we do with refund money that was originally sourced from 529 plans?
529 Plan Spending Review
First, let’s review the spending rules for 529 Plans. As long as funds from a 529 plan are used for qualified expenses (see below) the money can be withdrawn tax free. In the event of a non-qualified distribution, the earnings portions of the distribution is subject to income tax at the beneficiary’s tax rate and there is an additional 10% penalty assessed.
Qualified Expenses
- Tuition
- Room and board
- Technology items (specific to education)
- Books and supplies
- Student loan repayments (on a state by state basis)
Your Refund Options
So once you have the refund check in your hands, what can, and what should you do with it?
1. Recontribute the refund to the 529 plan. If the beneficiary of a 529 plan receives a qualified expense refund that was paid for using money from a 529 plan, the refund can be recontributed. The guidelines and rules for recontributions are as follows:
- The refund must come from the account beneficiary’s eligible institution.
- The recontribution cannot exceed the refunded amount.
- It will be treated entirely as principal.
- Any recontribution doesn’t count as a contribution for the 2020 tax year.
- The refund must be recontributed to a 529 plan with the same beneficiary.
- The refund should be recontributed within 60 days of the date of refund. (Note: The IRS has issued guidelines that state that if the 60 day period ends on or after April 1st, but before July 15th, 2020; the recontribution may be made any time before the latter of July 15th or 60 days after the refund date).
- While you can use a 529 plan to pay for K-12 private schooling, as of now K-12 refunds are not eligible for recontribution.
2. Do not recontribute the refund. As stated above, if the refund is not put back into the 529 or used for a qualified expense it becomes a non-qualified distribution and the associated penalties will apply.
3. Use the refund for another qualified educational expense. This option is less cut and dry than the other two. If a refund for tuition or room and board is taken and used to pay for technology or books needed to take part in online education, that should still be counted as a qualified expense. As with any qualified expense, be sure to save receipts and document everything.
How We Can Help
If you have a question regarding a refund you have received, or are interested in learning more about Maryland 529 plans, contact us or give our office a call at 410.685.9685.
