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  • 529 Strategy

    So my son is planning to take a semester abroad in January. After reviewing the credentials of the visiting European school, it appears that it is not a qualified college for 529 withdrawals. Looking at the rules, it appears that in the case of a semester away, both the primary school and the visiting college need to be qualified institutions. Using 529 money for attendance at a nonqualified college would be subject to a 10% penalty and incur federal taxes on the money.

    There is extra money in the account, because he received a half scholarship. Scholarship awards can be withdrawn without penalty from 529 accounts, but you are still required to pay taxes on the earnings.

    What I am thinking of doing to avoid taxes and penalties is this: fund this semester out of my aftertax account, transfer the total sum thus funded from my son’s 529 account to his younger sister’s 529, and then forego future contributions I would otherwise have made to her account until the transferred amount is reached (instead using those funds to replenish my aftertax account).

    Any thoughts or suggestions here? Am I missing something? Thanks in advance!
    My Youtube channel: https://www.youtube.com/channel/UCFF...MwBiAAKd5N8qPg

  • #2
    no need to transfer 529s within the same generation from my understanding.  No reason to bring money out via the scholarship exception if you're still underfunded in the 529 itself.

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    • #3
      Thanks - no the 529 is actually overfunded, and my daughter's is not yet fully funded. Agree my plan wouldn't make sense otherwise.
      My Youtube channel: https://www.youtube.com/channel/UCFF...MwBiAAKd5N8qPg

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      • #4
        Sounds like a good plan.  I have done something similar with my older two.

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