Personal Investment & Financial Planning Q`s/529 distributions

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QUESTION: Dear Mr. Smith...We recently (during the summer)made a distribution from a 529 plan to pay for some of our son's college expenses.  We now realize that we mistakenly had the distribution made from our younger daughter's account.  She is not in college yet.  We can we do to rectify the situation?  We simply got the account numbers mixed up.  Any advice you can provide is appreciated.  Thank you...Amy

ANSWER: Hi Amy. The nice thing about 529 plans is that there is flexibility in changing beneficiaries so if the concern is that your daughter will now not have enough in her account, the easy solution will be for you to take the "excess" funds in your sons account (since money was instead taken from your daughters account) when he is finished using the money and change the beneficiary to your daughter. However, there may be another piece to this which is what you might be asking; since the law allows for tax free withdrawals for expenses related to the beneficiary of the account, this is not what occurred. I would call the 529 sponsor and talk to them and see what they suggest. There may be a form they have which allows you to move money from one account to another to correct this mistake. I hope this helps.



---------- FOLLOW-UP ----------

QUESTION: Hi again...Thanks for your answer.  I did speak with the 529 sponsor yesterday and they suggested I speak with a tax advisor and/or the IRS.  After reading up on 529 distributions, my concerns are that a 1099-Q will be sent with my daughter's name/SSN when it should really be my son's info.  In addition, until we correct the balance is his account, his assets are inflated.  That could affect the FAFSA that we fill out in 2015.  Any other suggestions, or should I call the IRS for their input?  Thanks again...Amy

Answer
Hi Amy. In full disclosure I am not a CPA so please do not take my answer as tax advice. I am familiar with 529 plans however. To be clear, it is allowable for the owner of a 529 plan (presumably you) to reimburse yourself for out of pockets costs associated with direct higher education costs for the beneficiary of the 529 plan. Therefore, as owner of the account, I am not sure if being concerned about the 1099 issuance is necessary. The bigger potential issue is that funds were withdrawn from your daughters account that were not used for her related costs and therefore this withdrawal could be subject to partial taxation and penalty. I am not sure how helpful the IRS would be in explaining this and therefore I would consult with a CPA. Depending on the dollar amounts involved, a CPA may advise that this mistake would not even run across the radar screen of the IRS and therefore if you remove money from your sons account and deposit it into your daughter account, then the problem rectifies itself if it is all done within the same tax year. If there are state tax advantages associated wit's putting money in the 529 plan then you obviously would not want to take this deduction.

Regarding the financial aid aspect, keep in mind that it's the recorded income from a 529 that counts the most towards aid eligibility not the account balance itself since the child does not technically own or control the account. I hope this additional insight helps.  

Personal Investment & Financial Planning Q`s

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John D Smith, CFP

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I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related comprehensive wealth management and investment concerns.

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I have been providing fee only investment management and comprehensive wealth management services for the past 19 years.

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I have a degree in Financial Planning & Counseling and I am also a Certified Financial Planner practitioner.

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