529 Withdrawal question

[FREE866]

Have a question regarding 529 plans


My sister had one for her daughter at Blackrock. She transferred it over to Schwab last year. Last week she had remaining money withdrawn and Schwab sent her a check directly to her. My sister said that when the account was with Blackrock, they would send check directly to her as well , but then then send a form for her to fill out that would "prove" the money ended up going for college expenses. When she asked Schwab for that form they said there is no form and Schwab will just send out a 1099 Q at end of year , but there is no other form.



My question is:


How will the IRS know that the money, in fact, went to pay for education expenses? If its not used for that I understand there is a 10% penalty

My sister could easily just spend the money on groceries no?


Also confused as to why Blackrock did provide a form and Schwab is saying they don't issue any form.



anyone have info or experience with this?


thanks

 

[Phroig]

Ours is at TIAA. There’s no form, but when I do a withdrawal, I’m asked if the withdrawal is for qualified education expenses. Regardless of whether there’s a form, your sister should keep good records of expenses paid. Also, it’s best if the payment is made directly to the school or the beneficiary. I’ve heard that payments made to the account owner frequently trigger IRS inquiries.

 

[FREE866]

Ours is at TIAA. There’s no form, but when I do a withdrawal, I’m asked if the withdrawal is for qualified education expenses. Regardless of whether there’s a form, your sister should keep good records of expenses paid. Also, it’s best if the payment is made directly to the school or the beneficiary. I’ve heard that payments made to the account owner frequently trigger IRS inquiries.

thx


yeah, for some reason the school doesn't accept direct payments she said. That would seem to make the most sense to me, but for whatever reason she said in past she always gets checks directly.

 

[Morgan22]

What you describe from Schwab seems normal to me.

When we used 529's for our kids, payment was always sent directly to me. 1099-Q sent to me in my name also at the end of the year. 1098-T from the school was sent to my kids in their names by the schools at the end of the year. Even though I always paid the school directly from my checking account via ACH or my credit card.
It works out fine on your taxes. Just keep records of the education expenses you were reimbursing yourself for/claiming AOTC for.

I've never been audited. But my daughter did claim the AOTC for herself one year and she did get a letter from the IRS. All she had to do was call them on the number listed on the letter and that cleared up any questions they had.

Edited to add: TurboTax asks questions to reconcile the 2 tax forms. For example, who was the Designated Beneficiary of the distribution reported on form 1099-Q. You will answer the Designated Beneficiary is my Dependent.
Who was the recipient of this distribution? You would answer Taxpayer (this could be you or your spouse if filing jointly).

I would guess other tax software would do the same.

 

[cathy63]

How will the IRS know that the money, in fact, went to pay for education expenses? If its not used for that I understand there is a 10% penalty

The IRS will not worry about it unless your sister is the subject of an audit or they look at her return for some other reason. She just needs to keep her receipts and the 1098-T from the educational institution so that she can provide documentation if she's asked for it.

In our case, we were asked for it one year. I had made a mistake entering a W-2, so the IRS sent a notice saying they were "fixing" our return and here were their new calculations that included the correct W-2 and also all of our 529 withdrawal as ordinary income plus a 10% penalty. (Even if we'd spent the 529 money on non-qualified things, it was ridiculous to assume it was entirely taxable gains and had no basis.) I replied by doing a 1040-X with the accurate W-2 info and also writing a letter that said our dependent had qualified education expenses that were greater than the amount we withdrew from the 529 account and here's a copy of her 1098-T to prove it. They processed the 1040-X and issued the refund we were due and never said another word about the 529 funds.

I am sure they never would have noticed or questioned the 529 withdrawals except for the other error. That caused a human to look at our return and find other docs with our SSNs and make the worst possible interpretation of them. We weren't eligible for any education credits, so our return didn't show that our daughter was a student, and apparently they never looked to see if she had a 1098-T or not.

 

[wmc1000]

Always worked for us getting the check. As others have said as long as there is a 1098-T for your dependent, in their name, you will have no tax issue when you directly get money from a 529 account.

 

[FREE866]

Thank you all for your responses--very much appreciated. You're all awesome!


Have a great day.


Oh, and I love Mondays!

 

[disneysteve]

Check was always sent to us. Then I paid tuition with a credit card for rewards as there was no fee. No form either. We were in the NY state plan.

 

[sengsational]

Buying groceries and saying it was for QHEE would be fraud if the groceries were not part of the "board" of a qualifying student. It's probably pretty safe to pull out the school's published budget amount, and answer "yes" to the tax interview question as to if all of it went towards QHEE. I'd suggest that the IRS has bigger fish than to go after people who are doing exactly what the law intended.

 

[Al in Ohio]

Have a question regarding 529 plans


My sister had one for her daughter at Blackrock. She transferred it over to Schwab last year. Last week she had remaining money withdrawn and Schwab sent her a check directly to her. My sister said that when the account was with Blackrock, they would send check directly to her as well , but then then send a form for her to fill out that would "prove" the money ended up going for college expenses. When she asked Schwab for that form they said there is no form and Schwab will just send out a 1099 Q at end of year , but there is no other form.



My question is:


How will the IRS know that the money, in fact, went to pay for education expenses? If its not used for that I understand there is a 10% penalty

My sister could easily just spend the money on groceries no?


Also confused as to why Blackrock did provide a form and Schwab is saying they don't issue any form.



anyone have info or experience with this?


thanks

Getting a form is unusual for that situation. An end of year 1099Q is typical. Keep a separate file for tracking your qualified education expenses. I staple invoices or expense receipts to the tuition or books or rent expenses with the 529 plan administrator paperwork that documents the payment amount and date do everything is tracked snd well documented. St end of year settle up amounts in fule with the 1099.

 

[Phroig]

I was avoiding having the checks made payable to me. It's good to know that hasn't caused any hassles for the folks here.