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529 distributions rules12/29/2023 ![]() You should consider consulting with a tax or legal advisor to determine any such consequences.Īll U.S. The tax consequences of using 529 Plans for elementary or secondary education tuition expenses will vary depending on state law and may include recapture of tax deductions received from the original state as well as penalties. Additionally, 529 Plans may be used for K-12 tuition for private, public, or religious school (up to $10,000 per year per Beneficiary). Qualifying expenses also include fees, books, supplies, and equipment necessary to participate in a registered apprenticeship program, and up to $10,000 (lifetime per student) can be used to repay student loans for the Beneficiary or the Beneficiary's sibling. The term also includes reasonable room and board for beneficiaries who are enrolled at least half-time at an Eligible Educational Institution. Expenses for special needs services incurred in connection with enrollment or attendance at an Eligible Educational Institution are also included in the definition. The term includes computers and peripherals, software (except for non-educational sports, games, or hobby software), and internet service if used primarily by the Beneficiary while enrolled at an Eligible Educational Institution. Undergraduate and graduate tuition, fees, books, supplies, and equipment required for a Beneficiary's enrollment or attendance at an Eligible Educational Institution. Qualified higher education expenses Close X Qualified Higher Education Expenses: 529 plans are specifically designed to help families - regardless of income level - save for college by offering the potential for tax-free growth and withdrawals if used for To encourage families to save for college. ![]() The Internal Revenue Code of 1986, as amended. Section 529 of the Internal Revenue Code specifies the requirements for qualified tuition programs (529 Plans). State-sponsored 529 plans are tax-advantaged college savings plans authorized by (Unqualified withdrawals may be taxable as ordinary income and subject to a 10% federal tax penalty.) The Pension Protection Act of 2006 made the tax-free character of 529s a permanent part of federal law. Earnings on 529 plans are tax-free if used for qualified higher education expenses. It is named after Section 529 of the internal revenue code, which authorized these types of tax-advantaged savings plans in 1996. If you withdraw the money in December for a tuition bill that isn't paid until January, you risk taking a taxable withdrawal because you didn't have sufficient qualified education expenses during the year of withdrawal.A 529 plan is an education savings plan operated by a state or an educational institution and designed to help families set aside funds for college. So although you won't find a rule on this explicitly stated anywhere in IRS publications or tax forms, the prevailing view by tax professionals is that 529 withdrawals must match up with the payment of the qualifying expenses in the same tax year. The IRS and Treasury Department are now proposing to develop a new rule permitting recipients of 529 plan distributions to count only those qualifying expenses paid during the same calendar year as the distribution, plus expenses paid within the first three months of the following year. Concerns have been raised that individuals could allow the account to grow indefinitely on a tax-deferred basis before requesting reimbursement or use distributions in earlier years to pay QHEEs in later years." "Section 529 is silent regarding whether distributions must be made from a section 529 account in the same tax year as QHEEs (qualified higher education expenses) were paid or incurred. ![]() But it approached the topic when it published Announcement 2008-17 in January 2008, which stated in part: ![]() The IRS hasn't specifically said yes or no to that issue. ![]() Surprisingly, the actual tax rules contained in section 529 and IRS Publication 970 don't spell out that the timing of expenses and distributions must match up in the same tax year. ![]()
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