Broker Check

529 Plan Distributions

| May 04, 2020

Distributions from 529 Plans are generally tax and penalty free if used for qualified educational expenses (tuition, room & board, fees, and supplies).

Just like other investment accounts, a tax Form 1099Q is issued to report the amount of the distribution, tax basis, and gains included in the distribution. Qualified expenses are then used to offset the tax on the distribution. Any excess distributions, meaning the taxpayer took out more money than expenses, are potentially taxed and subject to penalty.

The recent COVID19 has not only forced some schools to transition to online instruction, but it has also caused some schools to send students home (from on-campus dorms) or even cancel the academic period.  As a result, some schools may be issuing refunds of tuition costs due to the shortened instruction.

These refunds may create an excess distribution from the 529 Plan and therefore create an unwanted tax surprise come tax time.  If taxpayers receive a refund, and therefore are at risk of an excess distribution, they may have the option to “re-contribute” the excess back into the 529 Plan so that it is not taxable.  Most 529 Plan sponsors allow up to 60 days to return the funds once the refund has been issued.