As a consequence of the Covid-19 pandemic, many colleges and other secondary schools have converted classrooms to online assignments and learning, or simply closed their doors. You or your student may have received refunds from their school for the remaining tuition, fees, or room and board.
If you used your 529 funds for any of these expenses, the refund could be deemed a taxable distribution by the IRS and you would have to pay income tax and a 10% penalty on the earnings of those funds.
To avoid this situation, you can re-deposit the refund into the same or another 529 account for the same beneficiary under the following guidelines:
- The refund must have come from the account beneficiary’s eligible institution;
- The re-deposit to the same beneficiary’s account must be a refund of qualified higher educational expense only, K-12 expenses are not eligible for re-deposit
- The re-deposit cannot be more than the refunded amount. For example, you withdrew $5,000 from your 529 account to pay for this semester’s expenses, but the refund from the school is $3,000. You can only re-deposit the $3,000.
Normally, the account owner has 60 days from the date of the refund to re-deposit the funds without tax without liability.
The IRS, under Notice 2020-23, has extended the current 60-day time limit for a re-deposit to a 529 account. If the 60-day period ends on or after April 1, 2020 and before July 15, 2020, the re-deposit can be made any time before the latter of July 15, 2020 or 60 days after the refund date.
As the account owner you are responsible for tracking and documenting the refund and the re-deposit.
If you have a financial planner or a tax advisor they should be able to help you with this process. Or, you should contact your plan manager directly:
Direct Portfolio 800.997.4295 Mon-Fri 6a to 7p (mountain)
Smart Choice (FirstBank) 303.237.5000 or 800.964.3444
Stable Value Plus 800.448.2424 Mon-Fri 8a to 5p (mountain)