There’s another check many are getting in the mail besides stimulus payments, and if you’re not careful, it could end up costing you money.
Colleges and universities have sent out refunds for at least part of a spring semester cut short by the coronavirus. Some families are getting college refund checks, often in the thousands of dollars.
If that money originally came from a 529 savings plan, investment pros like Denis Horrigan of Connecticut Wealth Management say you might be best served by putting it right back. He explained if you keep the college refund, you won’t get taxed on what you originally invested in a 529, but “The growth, is taxable income to you. In fact, there would be a 10% penalty on that growth too.”
Because of this Horrigan suggested, “If you do receive this check back, I would consider first and foremost that you put it back in a 529 plan, and then you can figure it out later.”
There’s a chance though, that:
- you might need that refund money
- your child may have just graduated college
- or, you don’t know how much of that money came from a 529 plan
If that’s true, you could keep the money, and use it at least in part to pay for “qualified expenses” other than tuition, room, and board, to reduce any potential taxes.
Qualified Higher Education Expenses: Generally, tuition, fees, books, supplies and equipment required for the enrollment or attendance of a Beneficiary at an Eligible Educational Institution; certain room and board expenses; the cost of computer or peripheral equipment, certain software, and internet access and related services if used primarily by the Beneficiary during any of the years the Beneficiary is enrolled at an Eligible Educational Institution; and certain expenses for special needs services. Except where otherwise noticed, any reference to Qualified Higher Education Expenses also includes a reference to tuition in connection with enrollment or attendance at a primary (i.e elementary school) or secondary (i.e. middle school or high school) public, private or religious school up to a maximum of $10,000 of distributions for such tuition expenses per taxable year per Beneficiary from at 529 Plans.
Source: CHET 529 College Savings Program Direct Plan Disclosure Booklet
“A lot of these kids are home now, they’re studying from home, if you spent money on a laptop, it’s a qualified expense, if you had money to spend on upgraded Wifi, that’s a qualified expense,” Horrigan said. Make sure you save those receipts.
A few other key points here - make sure you check what the rules are with the precise 529 plan your child is enrolled with. Most states offer 529s, and each one can be a little different. Also, you don’t have a lot of time to do this. You have 60 days to reinvest the refunded money in a 529 before it becomes a taxable event.
Connecticut Treasurer Shawn Wooden, who oversees Connecticut’s “CHET” 529 college savings plan, addressed the reinvestment deadline in a statement. He told NBC Connecticut:
“The COVID-19 health crisis has affected all of us here in Connecticut and college students are no exception to that, and the State of Connecticut remains committed to helping families save for future college costs. When it comes to receiving refunds from colleges, given the transition to online learning, it’s important to know that refunds should be re-contributed back into your 529 plan account within 60 days of the refund date to avoid paying any penalty or taxes on the earnings. Under temporary IRS guidance, due to the current unusual circumstances, if that 60-day period ends on or after April 1, 2020 and before July 15, 2020, then the re-contribution can be made any time before the later of July 15, 2020 or 60 days after the refund date. We encourage you to visit aboutchet.com for more information.”