I have often positioned the 529 plan as the gold standard for college planning. You put money in an account that grows tax deferred and when used for qualified college expenses (tuition, room and board, etc.), the money is completely tax-free. Also, some states even offer a state income tax deduction. Iowa is one of them. This is a fantastic way to save and plan for college.
Unfortunately, 2020 has not turned out as planned. Most of you with children in college have unexpectedly served as “Dorm Parents” this spring as your kids finish their semester online. Because students haven’t been allowed on campus, many colleges and universities are considering a refund for services no longer necessary, room and board, for example.
If you are receiving a refund of money already spent from a 529 plan, you will want to be careful not to simply cash the check and move on with life. If you were audited, this refund could be deemed a “nonqualified distribution.” It would be subject to tax and penalties.
I’ve contacted our state administered 529 Plan called College Savings Iowa, and they have notified me that you can return the money to the plan. BUT, DO NOT DELAY! If this refund is coming back due to COVID-19, you can return it to the account it came from by July 15, 2020, with no consequences. To do this, endorse the check and make it payable to the 529 plan that it came from. (See your specific state.) Then, mail the check, along with a signed letter of instruction explaining that the funds should be deposited into the account following the PATH Act.
The PATH Act has language allowing for refunds to be returned to a 529 plan. That is why they want you to reference this. The 1099-Q tax form will not be altered. Those funds can then be used for another school year. Or, if colleges continue online in the fall, you could upgrade your computer software and internet access, all qualified withdrawals.
If you fall into this refund situation reach out to us, your Foster Group advisors. We can help guide you through this process.