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With the cancellation of in-person classes and the closing of dorms as a result of the COVID-19 pandemic, a number of colleges and universities have provided partial rebates/refunds for tuition and other costs like room and board.  Many of these costs had been covered from funds withdrawn from the students’ 529 plan.  As a result, families may be wondering how they should handle the refunds and whether the money can be rolled back into the 529 plan.

As a refresher, distributions from a 529 plan are exempt from both federal and state income tax if used for qualified education expenses.  Costs for tuition, fees, and room and board paid to an accredited institution are examples of expenses that are considered qualified expenses.   Under normal rules, refunds must be contributed back to the 529 plan within 60 days of receipt.  However, the IRS has extended the deadline for re-contributing those refunds back to the students’ 529 plan to the new tax filing deadline of July 15, 2020.

So what happens if funds are not rolled back?

Unless the refund is directed toward other qualifying expenses this calendar year (think Fall semester), it will be considered a non-qualified distribution, and the earnings portion of the distribution will be subject to both Federal and State income taxes plus a 10% tax penalty.

Account owners should always thoroughly document all transactions into and out of the 529 plan, including any refund rollover or the use of returned funds.  Contact your 529 plan sponsor for direction on how to re-contribute funds as the logistics will differ by plan.



General Disclosures: Please consult your Tax Advisor for a complete discussion of your situation and specific tax consequences.  The content contained in this article represents the opinions and viewpoints of Cardan Capital Partners only. It is meant for educational purposes and not meant for consumer decisions. All expressions are as of its publishing date and are subject to change. There is no assurance that any of the trends mentioned will continue in the future. Market performance cannot be predicted, so nothing in our commentaries is ever meant to provide any kind of trading advice or guarantee of future results. Certain information contained herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. Any reproduction or distribution of this presentation, as a whole or in part, or the disclosure of the contents thereof, without the prior consent of Cardan Capital Partners, LLC, is prohibited.

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