529 Plan and Tuition Assistance

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terps223

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Jul 21, 2020
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Hello everybody. I am a sophomore at the University of Maryland and I'm in the ROTC program as a non-scholarship cadet. I plan on going to the basic camp this summer and becoming a contracted SMP cadet. I'm an in-state student and I live with my mom off-campus so my only expenses are tuition and books. I already paid tuition this semester and I plan on paying tuition with my State Tuition Waiver (STW), which gives me a 50% tuition waiver at UMD, and a combination of federal and state tuition assistance. My question is since I won't be on scholarship, can I take qualified distributions from a 529 college savings plan up to the amount I would have otherwise paid in tuition? Since my tuition will be covered, I don't want to liquidate the 529 plan because I'll have to pay taxings on the earnings and a 10% penalty.
 
I've been looking into a somewhat related question, and I have gathered two general points: 1) if you get a scholarship (for tuition in this example), you can withdraw the amount of the scholarship from a 529 plan without having to pay the 10% penalty. But I do not know if STW + "federal and state tuition assistance" is treated the same as a scholarship for 529 purposes. And 2) to the extent that the aforementioned withdrawal exceeds remaining qualified expenses, the earnings portion of the withdrawal is taxed at the student's tax rate, which could very well be nominal (but of course this depends on how much other income you have).

There is a fair amount written on this subject by CPAs readily available on the Internet.
 
franknd said:
I've been looking into a somewhat related question, and I have gathered two general points: 1) if you get a scholarship (for tuition in this example), you can withdraw the amount of the scholarship from a 529 plan without having to pay the 10% penalty. But I do not know if STW + "federal and state tuition assistance" is treated the same as a scholarship for 529 purposes. And 2) to the extent that the aforementioned withdrawal exceeds remaining qualified expenses, the earnings portion of the withdrawal is taxed at the student's tax rate, which could very well be nominal (but of course this depends on how much other income you have).

There is a fair amount written on this subject by CPAs readily available on the Internet.
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Appreciate your input! If I have to, I would liquidate the 529 plan while my income is still low, but I want to take as much money out in qualified distributions as possible to avoid the tax penalty that comes with non-qualified distributions.
 
terps223 said:
Hello everybody. I am a sophomore at the University of Maryland and I'm in the ROTC program as a non-scholarship cadet. I plan on going to the basic camp this summer and becoming a contracted SMP cadet. I'm an in-state student and I live with my mom off-campus so my only expenses are tuition and books. I already paid tuition this semester and I plan on paying tuition with my State Tuition Waiver (STW), which gives me a 50% tuition waiver at UMD, and a combination of federal and state tuition assistance. My question is since I won't be on scholarship, can I take qualified distributions from a 529 college savings plan up to the amount I would have otherwise paid in tuition? Since my tuition will be covered, I don't want to liquidate the 529 plan because I'll have to pay taxings on the earnings and a 10% penalty.
Click to expand...
Good morning, I’m sorry I don’t know the answer to your question but would love to know if you like UMD? My son just received his acceptance last week and would be enrolling in ROTC also. He has a couple schools we are still waiting to hear from but UMD is at the top of the list. Unfortunately we were never able to tour due to COVID closures.
 
There are these 2 threads that have some discussion, not sure how helpful these could be for you

529 plan funds options

Would appreciate any experience/guidance others may have We‘ve saved a reasonable sum in 529 plan that we would like to use for DS’s educational expenses at WP. This would allow for tax minimization while maintaining original purpose. As a hypothetical, our understanding would be (apologies...
www.serviceacademyforums.com

529 withdrawal

I have read many posts on various Academy sites but am curious whether anyone has completely withdrawn their cadet's 529 funds while they can. Apparently there is no penalty for doing so if the cadet has received a full scholarship. Why would anyone do so? Our financial advisor recommended...
www.serviceacademyforums.com
 
SAhopefulmama said:
Good morning, I’m sorry I don’t know the answer to your question but would love to know if you like UMD? My son just received his acceptance last week and would be enrolling in ROTC also. He has a couple schools we are still waiting to hear from but UMD is at the top of the list. Unfortunately we were never able to tour due to COVID closures.
Click to expand...
I just transferred in this semester so I can't speak to what it's like on-campus, but everybody I've spoken to associated with the ROTC department has been awesome and I like my classes!
 
@AROTC-dad Thoughts? We put 529 funds to our son's school (non ROTC) and the school writes him a check for the excess above tuition and fees. He uses that excess (5K per semester) for his rent, food, gas, books, ... @terps223 - look up the 529 rules online at account website.

Per US News...
Off-campus housing
"While investors can use 529 funds to pay for a college's room and board fees, housing arrangements off campus also count. "Off-campus housing and rentals are qualified up to the cost of room and board on campus," Hogan says. For instance, if university-owned housing is $800 per month, then the disbursement for an off-campus rental can't be more than that amount."
 
AROTC Parent said:
@AROTC-dad Thoughts? We put 529 funds to our son's school (non ROTC) and the school writes him a check for the excess above tuition and fees. He uses that excess (5K per semester) for his rent, food, gas, books, ... @terps223 - look up the 529 rules online at account website.

Per US News...
Off-campus housing
"While investors can use 529 funds to pay for a college's room and board fees, housing arrangements off campus also count. "Off-campus housing and rentals are qualified up to the cost of room and board on campus," Hogan says. For instance, if university-owned housing is $800 per month, then the disbursement for an off-campus rental can't be more than that amount."
Click to expand...
I'm not currently paying my mom rent, so if I drew up a rental agreement and paid her rent with qualified distributions from the 529 plan, how would she give that money to me without me having to pay taxes on it?
 
terps223 said:
I'm not currently paying my mom rent, so if I drew up a rental agreement and paid her rent with qualified distributions from the 529 plan, how would she give that money to me without me having to pay taxes on it?
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I'm not a tax accountant but we gave our children $ under the annual gift tax exclusion which is currently $15K per year. They eventually used these funds and their own savings for their first home down payment.
 
AROTC Parent said:
@AROTC-dad Thoughts? We put 529 funds to our son's school (non ROTC) and the school writes him a check for the excess above tuition and fees. He uses that excess (5K per semester) for his rent, food, gas, books, ... @terps223 - look up the 529 rules online at account website.
Click to expand...

I am a CFP® practitioner and not a CPA, but here is my opinion.

To the best of my knowledge there is very little difference between a scholarship and a tuition waiver revenue from the student’s perspective. The IRS does not tax either scholarships or tuition waiver so long as it applies toward tuition and required fees. However when room and board is involved, a scholarship then becomes taxable income. (see IRS Topic at this link: https://www.irs.gov/taxtopics/tc421).

Yes, mom and dad can issue you a "room and board" bill for the 529 money for living at home, but now someone has to declare that as income. If mom and dad take it as income, it would likely be at a much higher tax rate than you. However if YOU take the income, , it could impact your next FAFSA submission, and possibly eliminate your eligibility next year for the tuition waiver - ugh!

Some also think it could flag you for an audit. I don't know.

If you do pursue this, the total home expenses just need to be less than what would be listed under U of M's Cost of Attendance estimate for living with parents: (look up “cost of attendance at U of M) You should simply keep a spreadsheet of food and pro-rated housing expenses to show you aren't living on caviar and champagne.

When my DS lived in an apartment, off-campus, he kept track of his off-campus living costs with his 3 roommates. So long as the total expenses did not exceed what the dorm expense was, we reimbursed him for the costs from the 529 plan (his ROTC scholarship was used for tuition). Because of the AROTC scholarship, DS still has 529 money left but plans to use that for grad school or his future kids (think of the compound growth).

For more info, look up IRS publication 970: https://www.irs.gov/forms-pubs/about-publication-970.

Don’t forget the cost of a computer is also eligible for 529 funds. IRS 970 Section 8 under QTP's states:

"The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)"

I hope this helps. (perhaps @Humey who is a CPA, can chime in?).

It was nice for DS to graduate debt free and money left over with a guaranteed job.

DS is enjoying fat combat deployment paychecks now at the expense of frayed parental nerves.
 
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AROTC-dad said:
I am a CFP® practitioner and not a CPA, but here is my opinion.

To the best of my knowledge there is very little difference between a scholarship and a tuition waiver revenue from the student’s perspective. The IRS does not tax either scholarships or tuition waiver so long as it applies toward tuition and required fees. However when room and board is involved, a scholarship then becomes taxable income. (see IRS Topic at this link: https://www.irs.gov/taxtopics/tc421).

Yes, mom and dad can issue you a "room and board" bill for the 529 money for living at home, but now someone has to declare that as income. If mom and dad take it as income, it would likely be at a much higher tax rate than you. However if YOU take the income, , it could impact your next FAFSA submission, and possibly eliminate your eligibility next year for the tuition waiver - ugh!

Some also think it could flag you for an audit. I don't know.

If you do pursue this, the total home expenses just need to be less than what would be listed under U of M's Cost of Attendance estimate for living with parents: (look up “cost of attendance at U of M) You should simply keep a spreadsheet of food and pro-rated housing expenses to show you aren't living on caviar and champagne.

When my DS lived in an apartment, off-campus, he kept track of his off-campus living costs with his 3 roommates. So long as the total expenses did not exceed what the dorm expense was, we reimbursed him for the costs from the 529 plan (his ROTC scholarship was used for tuition). Because of the AROTC scholarship, DS still has 529 money left but plans to use that for grad school or his future kids (think of the compound growth).

For more info, look up IRS publication 970: https://www.irs.gov/forms-pubs/about-publication-970.

Don’t forget the cost of a computer is also eligible for 529 funds. IRS 970 Section 8 under QTP's states:

"The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)"

I hope this helps. (perhaps @Humey who is a CPA, can chime in?).

It was nice for DS to graduate debt free and money left over with a guaranteed job.

DS is enjoying fat combat deployment paychecks now at the expense of frayed parental nerves.
Click to expand...
Are you saying I can receive a qualified distribution from the 529 plan for the amount I save on tuition via the tuition waiver and financial assistance as long as I don't put that money towards room and board? I am going to get the tuition paid for via the tuition waiver and financial assistance, my goal here is to take out as much money from the 529 plan in the form of qualified distributions to avoid the 10% penalty.
 
terps223 said:
Are you saying I can receive a qualified distribution from the 529 plan for the amount I save on tuition via the tuition waiver and financial assistance as long as I don't put that money towards room and board? I am going to get the tuition paid for via the tuition waiver and financial assistance, my goal here is to take out as much money from the 529 plan in the form of qualified distributions to avoid the 10% penalty.
Click to expand...

From Investopedia:

529 Plan and Scholarship​

If your child receives a tax-free college scholarship or grant, the amount of that scholarship or grant must be deducted from total qualified education expenses as part of the determination of their AQEE.

The scholarship exception, however, lets you withdraw up to the amount of that scholarship and use the money for any purpose penalty free. The earnings on that portion of the distribution will still be subject to income tax. However, if you use the withdrawal for qualified educational expenses, the money will be both tax and penalty free.

The scholarship clause is important, because if your child does not receive a scholarship (or meet one of the other exceptions) and you withdraw funds that are not used for qualified education expenses, you will owe both taxes and a 10% penalty on the earnings.

Also from the same source:

It's indisputable that you can take a penalty-free scholarship-based distribution from your 529 plan and use the money for any purpose. There remains a question about when you can take this distribution. Absent guidance from the IRS the following advice seems prudent:


  • If possible and to avoid any problems, take the distribution before the end of the calendar year in which the scholarship or grant was awarded.
  • If you want to delay taking the distribution beyond the calendar year as just noted, contact your plan administrator to make sure there are no state or plan rules that might impose a penalty.
  • At the same time, contact a trusted tax advisor for counsel.

As always, remember that you can avoid the 10% penalty—but not regular taxes—on any exempt distribution of earnings used for nonqualified expenses.

Source: https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/
 
The Investopedia passage is a more detailed version of what I wrote in summary fashion above.
 
AROTC-dad said:
From Investopedia:

529 Plan and Scholarship​

If your child receives a tax-free college scholarship or grant, the amount of that scholarship or grant must be deducted from total qualified education expenses as part of the determination of their AQEE.

The scholarship exception, however, lets you withdraw up to the amount of that scholarship and use the money for any purpose penalty free. The earnings on that portion of the distribution will still be subject to income tax. However, if you use the withdrawal for qualified educational expenses, the money will be both tax and penalty free.

The scholarship clause is important, because if your child does not receive a scholarship (or meet one of the other exceptions) and you withdraw funds that are not used for qualified education expenses, you will owe both taxes and a 10% penalty on the earnings.

Also from the same source:

It's indisputable that you can take a penalty-free scholarship-based distribution from your 529 plan and use the money for any purpose. There remains a question about when you can take this distribution. Absent guidance from the IRS the following advice seems prudent:


  • If possible and to avoid any problems, take the distribution before the end of the calendar year in which the scholarship or grant was awarded.
  • If you want to delay taking the distribution beyond the calendar year as just noted, contact your plan administrator to make sure there are no state or plan rules that might impose a penalty.
  • At the same time, contact a trusted tax advisor for counsel.

As always, remember that you can avoid the 10% penalty—but not regular taxes—on any exempt distribution of earnings used for nonqualified expenses.

Source: https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/
Click to expand...
Just to clarify, I can withdraw money from the 529 plan up to the amount of money I receive from the tuition waiver and tuition assistance and avoid the 10% penalty under the scholarship exception. However, if I do not use the money I withdraw for qualified educational expenses, I still have to pay taxes on it, correct?
 
terps223 said:
Just to clarify, I can withdraw money from the 529 plan up to the amount of money I receive from the tuition waiver and tuition assistance and avoid the 10% penalty under the scholarship exception. However, if I do not use the money I withdraw for qualified educational expenses, I still have to pay taxes on it, correct?
Click to expand...
That's how I read it.
 
terps223 said:
I'm not currently paying my mom rent, so if I drew up a rental agreement and paid her rent with qualified distributions from the 529 plan, how would she give that money to me without me having to pay taxes on it?
Click to expand...
Anyone can gift anyone 15,000 per year without there being an issue.
 
AROTC-dad said:
I am a CFP® practitioner and not a CPA, but here is my opinion.

To the best of my knowledge there is very little difference between a scholarship and a tuition waiver revenue from the student’s perspective. The IRS does not tax either scholarships or tuition waiver so long as it applies toward tuition and required fees. However when room and board is involved, a scholarship then becomes taxable income. (see IRS Topic at this link: https://www.irs.gov/taxtopics/tc421).

Yes, mom and dad can issue you a "room and board" bill for the 529 money for living at home, but now someone has to declare that as income. If mom and dad take it as income, it would likely be at a much higher tax rate than you. However if YOU take the income, , it could impact your next FAFSA submission, and possibly eliminate your eligibility next year for the tuition waiver - ugh!

Some also think it could flag you for an audit. I don't know.

If you do pursue this, the total home expenses just need to be less than what would be listed under U of M's Cost of Attendance estimate for living with parents: (look up “cost of attendance at U of M) You should simply keep a spreadsheet of food and pro-rated housing expenses to show you aren't living on caviar and champagne.

When my DS lived in an apartment, off-campus, he kept track of his off-campus living costs with his 3 roommates. So long as the total expenses did not exceed what the dorm expense was, we reimbursed him for the costs from the 529 plan (his ROTC scholarship was used for tuition). Because of the AROTC scholarship, DS still has 529 money left but plans to use that for grad school or his future kids (think of the compound growth).

For more info, look up IRS publication 970: https://www.irs.gov/forms-pubs/about-publication-970.

Don’t forget the cost of a computer is also eligible for 529 funds. IRS 970 Section 8 under QTP's states:

"The purchase of computer or peripheral equipment, computer software, or Internet access and related services, if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)"

I hope this helps. (perhaps @Humey who is a CPA, can chime in?).

It was nice for DS to graduate debt free and money left over with a guaranteed job.

DS is enjoying fat combat deployment paychecks now at the expense of frayed parental nerves.
Click to expand...
What those 529 plans never tell you that is works against you on the FSFA. Those funds are treated as belonging to the student and when calculating assets, they are worth more (therefore work against you) than if these same funds were sitting in the parents bank account
 
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You can withdraw up to the amount of the scholarship without having to pay the 10% penalty, but you will have to pay taxes on the earnings. (A portion of each withdrawal is considered to be from principal, and a portion comes from earnings.)

I am a CPA, if that makes any difference
 
Humey said:
What those 529 plans never tell you that is works against you on the FSFA. Those funds are treated as belonging to the student and when calculating assets, they are worth more (therefore work against you) than if these same funds were sitting in the parents bank account
Click to expand...

I think I said that....but it is good to have corroboration. :cool:

AROTC-dad said:
However if YOU take the income, , it could impact your next FAFSA submission, and possibly eliminate your eligibility next year for the tuition waiver - ugh!
Click to expand...
 
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