529 Plan

Discussion in 'Service Academy Parents' started by navy, Jan 23, 2012.

  1. navy

    navy Member

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    I have just spent the afternoon on the phone with my state 529 plan folks. Interesting conversation. They knew very little of the Air Force Academy. I am curious about my options for my son's 529 account. I know one option will be to roll it to his sibling. Any thoughts on othjer options will be appreciated. I believe books are a qualified expense. Any thoughts?
     
  2. marciemi

    marciemi USMA Alumnus

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  3. navy

    navy Member

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    Thanks for the link. It appears my options are to :
    1. Roll account balance to Sibling. This appears to be easiest option.

    2. Withdraw the entire amount. Using the following guidance:

    The earnings portion of a distribution not used for a beneficiary's qualified education expenses is subject to federal and state income taxes and a 10% federal penalty tax. Exceptions to this penalty include a withdrawal made because the beneficiary:


    Has died or become disabled.

    Received a scholarship, to the extent the withdrawal amount does not exceed the scholarship amount.

    Has enrolled in the United States Military Academy, the United States Naval Academy, the United States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy, to the extent that the amount of the withdrawal does not exceed the costs of advanced education attributable to such attendance.
    Any accumulated earnings that are withdrawn from your account must be included on the income tax return of the recipient for the tax year in which they are distributed. Contact your tax advisor about how to report a nonqualified withdrawal.


    Has anyone done this? Any advice? Are there limits on the amount per year? How much of a tax headache is created?

    3. Utilize the account for Qualified expenses? I assume the USAFA is a qualified education institution. Keep receipts for books and withdraw the amount each semester. What kind of documentation is required, And what tax issues if any arise?

    Last question. Is there a time limit on qualifed withdrawals? Are book expenses for 2011 too late to submit? Would a 4 Dg be eliglble to claim the issued computer?

    I would appreciate any ideas. I will contact the 529 folks on Monday to discuss.

    Thanks
     
  4. navy

    navy Member

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    It appears after some research. The Academy may not be a qualified institution with regard to 529 plans. So Option 3 may not work. The Hairstyling Academy in COS qualifies, but the Air Force Academy appears to not qualify. I just love our tax laws!
     
  5. navy

    navy Member

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    During my research i found the following which may be useful:

    MEMORANDUM FOR: CADETS AND PARENTS OF CADETS RECEIVING
    SCHOLARSHIPS AND/OR EDUCATIONAL INVESTMENT PLAN PROCEEDS
    10 June 2011
    FROM: USAFA/FMP
    SUBJECT: Cadet Scholarship and/or Educational Investment Plan Proceeds
    1. The United States Air Force Academy (USAFA) Financial Management (FM) Office may
    not accept cadet scholarships containing restrictions. Restrictions are any condition or limitation
    an agency places on the use of their scholarship funds. Some examples include “must be used
    for tuition, room and/or board,” “student is required to maintain a specific GPA,” “scholarship
    funds will be paid back if cadet disenrolls,” etc. Cadet scholarships without restrictions or silent
    on restrictions will continue to be accepted. Educational investment funds (e.g., 529 plans) may
    not be accepted due to their federal and state tax restrictions and, based on the specific plan, may
    have other restrictions on how the funds are used. Normally a university financial aid office
    monitors scholarships and investment plan proceeds; however, the USAF Academy is not
    eligible to participate in the student aid program and does not have a financial aid office. We do
    not charge for tuition, room or board like other universities or have the authority to maintain
    separate billing and receiving accounts required to monitor the restrictions levied by law. The
    following will assist with scholarship and/or investment plan questions.
    a. Scholarships: Scholarships should be payable directly to the cadet. When the agency
    is unable to make payment directly to the cadet, the scholarship may be accepted by USAFA/FM
    for credit to the cadet’s pay account provided there are no restrictions on the scholarship and the
    check is payable to the U.S. Treasury. Scholarships silent on restrictions will be treated as nonrestrictive
    and accepted. Scholarships accepted by USAFA/FM are never refunded to the agency
    granting the scholarship, even if the cadet disenrolls. Checks shall be made payable to “US
    Treasury” and mailed to HQ USAFA/FMF, 2304 Cadet Drive, Suite 2200, USAF Academy, CO
    80840-5035. Checks will not be accepted until after 19 August 2011 for the Class of 2015. The
    cadet’s full name and social security number must be included in the memo area of the check or
    on an attached memo.
    b. Investment Plans: The individual owner or administrator of the educational
    investment plan determines the valid use of the funds based on specific fund requirements and
    any state, federal and/or IRS restrictions. The owner/administrator shall consult their financial
    advisor, tax advisor or legal advisor to ensure the specific fund rules are followed and if there are
    procedures for providing proceeds directly to the cadet. Investment plan proceeds will not be
    accepted by USAFA/FM, and if received, shall be returned to the originator. Based on
    information provided by the IRS, it is our understanding that the Military Family Tax Relief Act
    of 2003 provides that attendance at a U.S. military academy will be treated as a scholarship for
    purposes of the 10% penalty on nonqualified withdrawals from a 529 plan or Coverdell ESA and
    that the value of the no-cost education (as determined under the U.S. military code) can be
    withdrawn penalty-free from a 529 plan or Coverdell ESA, although the earnings portion will
    continue to be taxable. Accordingly, parents and financial planners have requested the Cost of
    Education (CoE) for USAFA. Please understand that we are not attempting, and are not
    authorized, to provide tax advice; we are simply providing information concerning the USAF
    Academy CoE for recent Fiscal Years. You are advised to consult your own tax advisors
    regarding permissible uses of this information. The USAFA CoE amount may be exempt from
    the 10% additional tax IAW IRS rules (see IRS Publication 970). The CoE at a Service
    Academy is defined in DoDD 1332.23 as: Those costs that are attributable directly to educating
    a person at a Service academy under regulations prescribed by the Secretary of the Military
    Department concerned and approved by the Office of the ASD (FM&P) (OASD (FM&P)) and
    the Office of the Assistant Secretary of Defense (Comptroller) (OASD(C)). Such costs include a
    reasonable charge for the provided education, books, supplies, room, board, transportation, and
    other miscellaneous items furnished at government expense. Excluded are the costs for cadet
    pay and allowances, uniforms, military training, and support for nonacademic military
    operations. The following is the CoE for the Fiscal Year (FY) indicated.
    FY10 $48,181 - 1 October 2009 - 30 September 2010
    FY09 $42,240 - 1 October 2008 - 30 September 2009
    FY08 $41,925 - 1 October 2007 - 30 September 2008
    FY07 $42,333 - 1 October 2006 - 30 September 2007
    2. USAFA is prohibited by law (10 U.S.C. 4360) from charging cadets for tuition, room or
    board and does not issue IRS Form 1098-T, Tuition Statement. Any tax consequence resulting
    from receipt of scholarships and/or educational investment plan proceeds is the responsibility of
    the cadet. Additional information on educational benefits is available on the IRS web site; see
    IRS Publication 970, Tax Benefits for Education.
    3. Tuition, room, board and cadet income and expenses at USAFA:
    a. USAFA cannot charge for tuition, room or board in accordance with 10 U.S.C.
    4360. Tuition, room and board are provided to cadets without charge.
    b. Cadet monthly base pay is $974.40 effective 1 January 2011. Cadet pay is equal
    to 35% of a 2nd Lieutenant pay in accordance with 37 U.S.C. 203(c).
    c. Cadet estimated expenses for Academic Year 2011/2012 (1 Jul 11-30 Jun 12) are:
    Expense
    Freshman
    Sophomore
    Junior
    Senior
    Uniforms 4,350 0 260 500
    Computer 2,291 72 72 66
    Personal Service Fees 1,728 297 297 272
    Arts and Athletic Fees 170 170 170 170
    Media and Textbooks 1,746 1,270 1,270 1,369
    Total $10,285 $1,809 $2,069 $2,377
    Definitions:
    Personal Service Fees include barber, tailor, linen, dry cleaning and laundry.
    Arts and Athletic Fees include reduced tickets to shows and sporting events.
    Media includes KAFA radio, basic training yearbook and annual yearbook.
    NOTE: Exact expenses are known only by the individual cadet based on their specific
    circumstances. The amounts shown above are only an estimate. The individual cadet
    receives a monthly Leave and Earnings Statement (LES) which provides information on
    actual income and those expenses deducted from their pay.
    4. The section of US Code that authorizes TSP participation applies only to those members
    who are paid under 37 USC 204 (only covers active duty and reserve members). Cadets are paid
    under a separate area of US Code (37 USC 203) and are therefore ineligible to participate in
    TSP.
    5. Please e-mail usafa.fm@usafa.af.mil if you have questions on the information contained
    in this memorandum which supersedes Memorandum 15 June 2010, same subject.
    TERRY W. ANDERSON, DAFC, CDFM, MBA
    Financial Management Policy
     
  6. Rocko

    Rocko Member

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    I know this is an old thread, but I was doing some digging around trying to find out what the current year CoE is at the Air Force Academy. I'm looking to withdraw funds from my sons 529 Plan and need to figure out how much is allowable for this year. I spoke with a financial advisor and they were not sure what the amount was nor could they point me to who may be able to provide it. I believe I can take 1/2 of the annual amount out this year since he will complete his first semester in December.

    If someone has a link where I can find the dollar amount allowed for the current Fiscal year I'd appreciate it.
     
    Last edited: Nov 11, 2014
  7. AROTC-dad

    AROTC-dad Just a dad

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    The Iowa 529 plan states the following on their website:

    What if I don't use the money in my account for a qualified higher-education expense?
    The earnings portion of a distribution not used for a beneficiary's qualified education expenses is subject to federal and state income taxes and a 10% federal penalty tax. Exceptions to this penalty include a withdrawal made because the beneficiary:

    •Has died or become disabled.
    •Received a scholarship, to the extent the withdrawal amount doesn't exceed the scholarship amount.
    Has enrolled in the United States Military Academy, the United States Naval Academy, the United States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy, to the extent that the amount of the withdrawal doesn't exceed the costs of advanced education attributable to such attendance.

    Any accumulated earnings that are withdrawn from your account must be included on the income tax return of the recipient for the tax year in which they are distributed. Contact your tax advisor about how to report a nonqualified withdrawal.

    For Iowa taxpayers, any previous deductions must be added back to Iowa taxable income in the year of the distribution.

    Here is the link:
    https://www.collegesavingsiowa.com/content/faqs_acctmaintenance.html
     
  8. Rocko

    Rocko Member

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    The question I have is:
    costs of advanced education attributable to such attendance.

    What IS this value for FY14/15?? I understand that taxes will be paid on the earnings but an amount up to CoE can be pulled out without paying the 10 percent penalty.....

    In all my searching I find the term CoE over and over but nowhere have I found where they put a dollar figure to it.
     
  9. AROTC-dad

    AROTC-dad Just a dad

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    This is from the USAFA website:
    Financial Statistics •FY12 impact to the surrounding community: $898.8 million
    •Total Cost per USAFA Graduate: $444,984
    ◦Cost of education is $46,392 per year•Each cadet receives approximately $929 monthly pay that covers the cost of uniforms, books and supplies, with a modest amount left for personal spending.

    Here is the link:
    http://www.usafa.af.mil/information/factsheets/factsheet.asp?id=21371
     
  10. RedDragon

    RedDragon Member

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    A follow-up question on withdrawing the money.....does anyone know if you must withdraw the $$ in the year the cadet would have needed the money? Or can you withdraw,for example, after the cadet has graduated?
     
  11. AROTC-dad

    AROTC-dad Just a dad

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    The Military Relief Act of 2003 essentially allowed only the 10% penalty to be relieved of the cadet/mid. Taxation still applies. I cannot find any rules mandating WHEN you must withdraw the funds, only that you will pay taxes on the withdrawals. Ideally though, it would be best for the owner of the 529 plan to change the beneficiary to another sibling/relative who then would benefit from the tax free treatment.


    source: http://www.savingforcollege.com/articles/when-your-child-wants-to-attend-a-US-military-academy-640
     
    Last edited: Nov 11, 2014
  12. Rocko

    Rocko Member

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    To clarify the earnings portion will be taxable and not the contributions. Which brings me to another idea. I've never seen a rule stating when the contributions had to be made.

    Lets say a person never had a 529 plan. Could they not open one, contribute the yearly allowance (10,000/person, 20,000/couple) and then pull it back out at the end of the year and realize the tax savings? Figuring the state tax rate is 5 percent that would save $1000 in taxes a year for 4 years.
     
  13. AROTC-dad

    AROTC-dad Just a dad

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    When you say "yearly allowance" I assume you are referring to the gift tax threshold which is now $14,000 per person, or $28,000 per couple.

    As for opening an account and withdrawing it at the end of one year is problematic for several reasons.

    1. 529 plans have operating expenses which will eat into the potential growth .
    2. Most investment choices that are going to deliver growth are also going to experience volatility. I don't recommend 529 plans for most people who are within three years of needing the funds for school.
    3. Each state has different rules about state tax treatment of 529 plans, so it would depend on your state. For example in California, there is no State Tax benefit. But even if there is a deduction, it might be reversed if you don't utilize the funds for qualified higher education expenses. See your local CPA, or EA for guidance.

    Overall, I can't see the benefits outweighing the above issues.

    reference:
    http://www.irs.gov/uac/529-Plans:-Questions-and-Answers
     
  14. Rocko

    Rocko Member

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    I didn't realize it was different state by state. Where I live the gain would far outweigh the cost of operating expenses as we can write off up to 20,000 per couple on our state income tax.

    That certainly wouldn't be the case if your state did not allow you to deduct those contributions from your income taxes....
     
  15. AROTC-dad

    AROTC-dad Just a dad

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    Yes, the variance from state to state is quite confusing. For example, in Colorado in some cases the state will match up to $500 in contributions to their state 529 plan!

    Here is a nice link that shows all the different states and some of the rules:
    http://www.savingforcollege.com/com...uestion_ids[]=438&page=compare_plan_questions
     
  16. philmont

    philmont Member

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    I too am wondering about the withdrawal time frame from a 529 when the withdrawal is made because the student attends a SA or the student received a 4 year ROTC scholarship.
    Not wanting to pull the money out too soon (after first 2 years 'just in case' scholarship wasn't maintained for whatever reason). In other words, to be prepared to repay if necessary.
    For qualified education expense withdrawals I understand they have to be in the same tax year but I wonder about this information from 529 plan re: withdrawals for non-qualified exemptions when student receives scholarship: "to the extent the withdrawal amount doesn't exceed the scholarship amount"…, IF at the end of 4 years (graduation year) the whole scholarship amount could be withdrawn without penalty? and tax on the earnings only? Or at least that's how I want to see it. Does anyone know the answer or do I have to call the IRS? :eek:
     
  17. AROTC-dad

    AROTC-dad Just a dad

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    This is a good question, Phil.

    Joe Hurley, a CPA who literally wrote several books on 529 plans says the following in response to a question posed on his website:

    Q: Jennifer A. Walker · Denver, Colorado
    Joe - if scholarship money is redrawn from the 529, does it have to be taken in the same year scholarship is received?

    A: Reply · · September 4 at 11:34am Joseph Hurley, CPA
    I know of nothing in the law or IRS pronouncements that requires the withdrawal to be taken in the same year as the scholarship.

    Source:
    http://www.savingforcollege.com/blo...-529-money-if-my-child-gets-a-scholarship-645

    So essentially your 529 plan has transformed due to the SA appointment, from a tax free savings vehicle to a tax-deferred savings vehicle.

    After your DS/DD is "in the clear" and graduated, ideally by changing the beneficiary you can keep the growth of the funds tax-free (or go back to school yourself and use it).

    Otherwise, because there really is no clearly stated IRS time constraint, The other thing to do is strategically plan to take the funds out when your DS or DD's tax bracket is lowest (as an ensign or 2LT).
     
  18. bearhunter66

    bearhunter66 Member

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    My son is attending USMMA.

    I am pulling out 1/12 of the 529 balance at the beginning of each trimester at the same time he is required to pay his midshipman fees.

    Not saying it is right but in the absence of any direction, it's a reasonable plan for us. Figure I would defer the hit on the taxes in a manner consistent with his attendance.


    Sent using the Service Academy Forums® mobile app
     
  19. AROTC-dad

    AROTC-dad Just a dad

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    +1
    I think this makes good sense, Bear, especially since his tax bracket will likely only rise after graduation.
     
  20. VelveteenR

    VelveteenR Just gathering dust in the nursery...

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    Thanks for resurrecting, MDDADD. We're going through this with our broker and accountant right now, and I'm appalled at the lack of experience and therefore guidance we're getting. We've been told that the funds (contribution portion, not earnings) can be withdrawn without penalty, but there are no rules for just how and when. The consensus seems to be to withdraw them on a schedule similar to when they would have been withdrawn at a civilian college, either by semester/trimester as bearhunter66 suggests upthread, or 1/4 of the funds annually, or ... but there is no rule and "whatever we choose to do is probably defensible" says our accountant. It's frustrating. We'd like to hold on to the funds until kiddo graduates from USMA just in case he ends up at a civilian college before then and needs them. If he doesn't need them, then we'd just like to roll the whole 529 into our retirement funds after he graduates.

    The other issue we're having is finding clear documentation from USMA on the estimated cost of the "scholarship" for determining how much of the funds are eligible for withdrawal. Our accountant says we will need official documentation of this number and I'm having a hard time finding it. We're going to have to call the treasurer's office as what I'm finding in the docs on the usma.edu/parents website is totally confusing:

    We're completely confused at this point.
     

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