PSA for folks who pay with 529 plans.

[plenzmd1]

Hey all, maybe not a lot of us on here, but if you are paying college costs with 529 plans just received a message from my daughters college. They stated that refunds need to be sent back to the plan if you received a refund or face a tax penalty. @Chef Jim , you very well may have been aware of this, I sure as chit was not. And we have 2 in college paying with 529 plans, and revived refunds for both. 
 

https://www.kiplinger.com/article/college/T002-C032-S014-the-coronavirus-529-plan-tax-risk-you-can-t-ignore.html

[KD in CA]

Are colleges doing refunds for COVID?   I was under the impression they had transferred everything online to avoid that.

[plenzmd1]

1 minute ago, KD in CA said:

Are colleges doing refunds for COVID?   I was under the impression they had transferred everything online to avoid that.

Room and board is being prorated and refunded. Not a huge amount , but between the two we prolly about $4800, 10% penalty would suck ! 

[Chef Jim]

Well let's think about this for a second.  You pulled money out of your 529 plan tax free to pay for qualified education costs.  You paid those cost but were refunded what you paid because college classes have been canceled.  So you in fact pulled money out of your 529 plan but because it was refunded you didn't need spend it. Sooooo put it back dude.  You have sixty days starting...............NOW!!

 

 

[Augie]

My wife failed to make a required withdrawal from her mom’s IRA. She thought she had done it, but couldn’t find where it ever happened or prove she had directed it to happen. A few grand, nothing huge but........WHAT IS HUGE is the penalty! Try like 50% penalty! That seems way over the top! It was an oversight! I’m sorry, that is excessively punitive in my mind. 

[plenzmd1]

10 minutes ago, Chef Jim said:

Well let's think about this for a second.  You pulled money out of your 529 plan tax free to pay for qualified education costs.  You paid those cost but were refunded what you paid because college classes have been canceled.  So you in fact pulled money out of your 529 plan but because it was refunded you didn't need spend it. Sooooo put it back dude.  You have sixty days starting...............NOW!!

 

 

Just going back out in July, but put it back we will! 
 

thought you may have clients like me with their head up their bottom and be good to give them a heads up!

[OldTimeAFLGuy]

16 minutes ago, plenzmd1 said:

Room and board is being prorated and refunded. Not a huge amount , but between the two we prolly about $4800, 10% penalty would suck ! 

 

...if it is a state run plan (ie. NY Saves), you only were entitled to a NYS deduction with nothing at the Federal level......in NYS, you can take a distribution (ie. leftover funds) at your normal ordinary income tax rate....I can double check, but I do not think there is a penalty..................

[KD in CA]

8 minutes ago, Augie said:

My wife failed to make a required withdrawal from her mom’s IRA. She thought she had done it, but couldn’t find where it ever happened or prove she had directed it to happen. A few grand, nothing huge but........WHAT IS HUGE is the penalty! Try like 50% penalty! That seems way over the top! It was an oversight! I’m sorry, that is excessively punitive in my mind. 

 

I hope nobody missed that little present Congress gave us last year that requires all Inherited IRAs (inherited post 2019) to be completely emptied within ten years.   

[plenzmd1]

5 minutes ago, OldTimeAFLGuy said:

 

...if it is a state run plan (ie. NY Saves), you only were entitled to a NYS deduction with nothing at the Federal level......in NYS, you can take a distribution (ie. leftover funds) at your normal ordinary income tax rate....I can double check, but I do not think there is a penalty..................

Wife does all that, while no deduction for taxes , gains are not taxed. I am not sure, but think if you use for non education purposes that is why the penalty. 
 

we still have two in college next year, so gunna go back in plan and right back out when fall semester  bill comes due. 

[Augie]

7 minutes ago, KD in CA said:

 

I hope nobody missed that little present Congress gave us last year that requires all Inherited IRAs (inherited post 2019) to be completely emptied within ten years.   

 

This was pre 2019, and my wife is pretty good at this stuff, then has the CPA review everything. She’s got it all on a schedule. Good luck to those who were unaware!

 

My wife has 100% of the distributions withheld to keep our April 15th bill down. Sick of having to write a big check. I’d rather get a check than write a check. Forget all that “you let them use your money for free all year” crap. 

[Chef Jim]

42 minutes ago, Augie said:

My wife failed to make a required withdrawal from her mom’s IRA. She thought she had done it, but couldn’t find where it ever happened or prove she had directed it to happen. A few grand, nothing huge but........WHAT IS HUGE is the penalty! Try like 50% penalty! That seems way over the top! It was an oversight! I’m sorry, that is excessively punitive in my mind. 

 

The penalty for missed RMD's is very high.  Yes 50%.  But think about it.  The money put in the IRA was likely taxed.  It grew taxed deferred all those years.  Now the feds want their money. 

33 minutes ago, KD in CA said:

 

I hope nobody missed that little present Congress gave us last year that requires all Inherited IRAs (inherited post 2019) to be completely emptied within ten years.   

 

Oh come on dude. That's not a bad thing.  The vast majority of inherited IRA's are liquidated in 10 minutes let alone 10 years.  ?

 

Very few stretched it over their lifetimes. 

[Augie]

Just now, Chef Jim said:

 

The penalty for missed RMD's is very high.  Yes 50%.  But think about it.  The money put in the IRA was likely taxed.  It grew taxed deferred all those years.  Now the feds want their money. 

 

Well, 50% for missing by a few months is rather steep. Not a big deal to us, but just maddening. Again, excessively punitive in my mind. This would be a HUGE deal to some people who just made an oops. I feel for those people. 

[Chef Jim]

32 minutes ago, plenzmd1 said:

Wife does all that, while no deduction for taxes , gains are not taxed. I am not sure, but think if you use for non education purposes that is why the penalty. 
 

we still have two in college next year, so gunna go back in plan and right back out when fall semester  bill comes due. 

 

The rule is if you use it for anything other than qualified education costs there is a 10% penalty on the earnings only.  

1 minute ago, Augie said:

 

Well, 50% for missing by a few months is rather steep. Not a big deal to us, but just maddening. Again, excessively punitive in my mind. This would be a HUGE deal to some people who just made an oops. I feel for those people. 

 

RMD's are a big pain in the butt.  Have them set up automatically based on the account value of 12/31 and you're cool. 

[KD in CA]

3 hours ago, Chef Jim said:

 

Oh come on dude. That's not a bad thing.  The vast majority of inherited IRA's are liquidated in 10 minutes let alone 10 years.  ?

 

Very few stretched it over their lifetimes. 

 

LOL.....that certainly was the goal for my wife's future B-IRA!

 

 

[Chef Jim]

4 minutes ago, KD in CA said:

 

LOL.....that certainly was the goal for my wife's future B-IRA!

 

 

 

I actually got a big client away from a much larger firm that shall remain nameless because of this.  I asked her what concerned her the most.  She said taxes.  We looked at her return.  I asked why are you distributing so much from your inherited IRA?  She said because her current advisor said she had to take it over 5 years.  No, you could have stretched it over your lifetime.  Wow was she pissed.  

[Hapless Bills Fan]

4 hours ago, plenzmd1 said:

Hey all, maybe not a lot of us on here, but if you are paying college costs with 529 plans just received a message from my daughters college. They stated that refunds need to be sent back to the plan if you received a refund or face a tax penalty. @Chef Jim , you very well may have been aware of this, I sure as chit was not. And we have 2 in college paying with 529 plans, and revived refunds for both. 
 

https://www.kiplinger.com/article/college/T002-C032-S014-the-coronavirus-529-plan-tax-risk-you-can-t-ignore.html

 

So good point. 

We haven't looked into it because our kid stayed put, is still obligated to fulfill the terms of the lease, and still buying her own food.  No refund 4 us.

But if your kid is living at home, are you allowed to use some of the 529 plan at least to feed them?