Can I reimburse myself this year from my 529 for last year’s tuition expenses?
My daughter starts college this fall, but her 529 has lost some earnings in recent months. Can I leave the money in the 529 to give it a chance to maybe recoup some of the losses? Then reimburse myself later in 2023 for tuition expenses paid in 2022?
The short answer is yes, you can, but you will lose the tax advantages you would have had if you had withdrawn the 529 money in 2022 for the tuition paid in 2022.
Qualified Higher Education Expenses (QHEE) “qualify” for the tax advantages when they are paid in the same tax year as the expense is incurred. The IRS defines Qualified Higher Education Expense:
“Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution. You must pay the expenses for an academic period that starts during the tax year or the first three months of the next tax year.”
If you were to withdraw money out of your 529 plan to reimburse yourself for a previous year’s tuition, that tuition expense is then “non-qualified”, and you will owe ordinary income tax on that disbursement plus a 10% penalty on any investment earnings included in that distribution.
It can be a little tricky for a semester starting in January. Often, for a semester starting in January, the university will send out the bill in December. It’s important to withdraw the funds and pay the university bill in the same tax year. If you withdraw funds in December, you should pay the university in December. If you wait for January, take the disbursement and pay the invoice both in January.
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