Refunded 529 Plan Money – Don’t Get Penalized!

If a student’s spring 2020 college tuition and/or fees was paid from a 529 plan and then refunded, any portion of the refunded amount returned to the 529 Plan or another qualified school savings plan is not subject to IRS or California State penalties or taxes.

 

As an added bonus, the IRS will allow the student to use the funds to pay for other ​eligible tuition and fee expenses due in 2020. ​ In addition, beginning with distributions made after 2018, the SECURE Act treats up the $10,000 of student loan principal and interest paid as 529 qualified educational expenses.

 

If not used for ​qualified tuition​, fees​, or other eligible costs ​(housing ​does not qualify) and not returned to the 529 Plan ​within the required time frame, you will pay taxes on that amount as well as possibly incurring a penalty.

 

​Normally, the deadline to return the money​ ​is 60 days from receipt of the money, however, if the 60-day period falls after April 1, 2020 and before July 15, 2020, the recontribution can be made any time before the later of July 15, 2020, or 60 days from receipt to avoid tax and the imposition of the early withdrawal penalty.

 

If you have any questions, give us a call at 559-924-1225.