529 Plan Again

[Christian]

Another client made a withdrawal from a remaining 529 Plan she has saying it was used to fund her daughter's tuition expenses. Her daughter decided to claim herself last year and the distribution is (of course) shown payable to Mama. Unless greatly mistaken this is another forbidden transaction and Mom will pay regular and penalty tax on the earnings ?

[Christian]

The term non-qualified distribution is a better descriptive of this I guess. ATX does not make reporting this all that easy. 

[Lee B]

As long as the mother used the distribution to pay her daughters qualified education expenses, I don't believe there is a problem.

529 Plan beneficiaries are not required to be dependents, they can be grandchildren or they can be unrelated.

 

[TexTaxToo]

2 hours ago, cbslee said:

As long as the mother used the distribution to pay her daughters qualified education expenses

That's assuming the daughter is the designated beneficiary.  If the mother is the beneficiary, you cannot use the distribution to pay someone else's expenses (the exception now is that up to $10,000 can be used to pay off a student loan of a sibling of the beneficiary).

The mother could have changed the beneficiary to the daughter before withdrawing the money.  I don't know if it is possible to fix it after the fact.

[Christian]

Well that clarifies that.

 

[Christian]

Well maybe not. The mother's name is shown on the withdrawal form. Usually a dependent's name is on the ones I have seen over the years. I have only the mom's statement as to how the funds were spent so I am leaving it up to the Service to decide if there has been a misstep.

[Lee B]

I

On 3/11/2023 at 2:28 PM, TexTaxToo said:

That's assuming the daughter is the designated beneficiary.  If the mother is the beneficiary, you cannot use the distribution to pay someone else's expenses (the exception now is that up to $10,000 can be used to pay off a student loan of a sibling of the beneficiary).

The mother could have changed the beneficiary to the daughter before withdrawing the money.  I don't know if it is possible to fix it after the fact.

The name and ssn on the 1098 T and the 1099 Q need to match.

 

[TexTaxToo]

16 hours ago, cbslee said:

The name and ssn on the 1098 T and the 1099 Q need to match.

Not sure that's true.  From the 1099-Q instructions:

Quote

QTP: List the designated beneficiary as the recipient only if the distribution is made (a) directly to the designated beneficiary, or (b) to an eligible educational institution for the benefit of the designated beneficiary. Otherwise, list the account owner as the recipient of the distribution.

Box 6 should tell you if the recipient is the designated beneficiary.

[Lee B]

On 3/11/2023 at 2:28 PM, TexTaxToo said:

That's assuming the daughter is the designated beneficiary.  If the mother is the beneficiary, you cannot use the distribution to pay someone else's expenses (the exception now is that up to $10,000 can be used to pay off a student loan of a sibling of the beneficiary).

The mother could have changed the beneficiary to the daughter before withdrawing the money.  I don't know if it is possible to fix it after the fact.

 

1 minute ago, TexTaxToo said:

Not sure that's true.  From the 1099-Q instructions:

Box 6 should tell you if the recipient is the designated beneficiary.

I am confused comparing your 2 posts.

[TexTaxToo]

Most financial institutions that have 529 accounts allow anyone to open a 529 account for any beneficiary.  The person who opens and controls the account is usually referred to as the "account owner".  This has caused some confusion, since the law itself makes no provision for an "account owner" who is not the designated beneficiary. 

If Box 6 on the 1099-Q is NOT checked, then the recipient is the beneficiary and you are correct that it should match the 1098-T.  

But if Box 6 is checked, the recipient is the account owner who is not the designated beneficiary.   But the proceeds must still be used for qualified expenses of the designated beneficiary to be tax-free.