529, Service academies & grad school withdrawals?

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vadad23

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Dec 19, 2016
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I know this question has been addressed in the past but question to some of those that already have been through this. As I understand it, if your DD/DS goes to a Service Academy, the full amount of the "value" of that education is considered to be a "Scholarship"...at least in the eyes of the IRS and how it applies the rules to penalties and withdrawals from the 529. I have heard various amounts estimated for a SA education scholarship value but most are around $350k-$450k. Given this, I think most of the research I have done indicates that I can pull up to this amount out penalty free and only pay ordinary taxes on the earnings(less principal paid in).

I also know you can change the beneficiary to another child or even to yourself for Qualified Educational expenses.

Question is the following: If I were to earmark the amount for DD to use for possibly going to graduate school AFTER her time at USNA or her service obligation and she ultimately does not go to grad school or Navy pays for grad school, will I still be able to withdraw the amount penalty free even though she had graduated from USNA years before? Is there a time limit to which the amount up the scholarship value can be pulled out penalty free?

Any accountants or tax lawyers out there?
 
Two things:

1) Keep in mind that Books, Computer, etc. aren't "free". They are issued, but the cost is actually deducted from Midshipman pay. This will be fully explained to the Midshipman, and details are probably available online somewhere, but Midshipman actually get paid a fixed pay (used to be 1/2 base pay of an Ensign) while serving. Of course, the Midshipman does not see all that money --it gets stashed away in an account, and deductions made for uniform issue, computers, books, haircut etc. In my day, you could also use what we considered "funny money" for certain items in the Midstore. The Midshipman gets the balance at graduation, I suspect, and perhaps a current Parent can confirm mechanics, that 529 money can be used for these expenses, resulting in the more cash to MIDN at graduation.

2) I heard at a recent BGO training program that USNA is trying to get away from promoting or using he $350-450K "scholarship" value. That is a double edged sword --it may reflect the actual cost of providing the education, including training programs, but leads those in Washington and other anti's to question why we have Service Academies when they can create an Ensign for a lot less at State U and NROTC/ OCS. (NOTE: I am not trying to provoke an argument or even discussion about merits of Service Academies v. NROTC/OCS , but rather passing on something I heard)
 
There is a document in the PTR packet that addresses the ACE loan and how non-tuition directed scholarship and 529 funds should be handled. I believe it also states the maximum amount USNA is allowed to accept...DS was working on getting a scholarship distribution setup earlier this week.
 
OP. Disclaimer: consult a real tax professional, but here's what I've heard. I don't think it's possible to carry over the military academy penalty exemption to the future. My understanding is that the 529 withdrawal has to occur in the same tax year the Mid is at USNA. I've also heard that the exemption is pegged to the declared value of the "scholarship" which is something like $50k/yr. I haven't been able to google where this amount is published.
 
dakine said:
OP. Disclaimer: consult a real tax professional, but here's what I've heard. I don't think it's possible to carry over the military academy penalty exemption to the future. My understanding is that the 529 withdrawal has to occur in the same tax year the Mid is at USNA. I've also heard that the exemption is pegged to the declared value of the "scholarship" which is something like $50k/yr. I haven't been able to google where this amount is published.
Click to expand...

@dakine, thank you! This was exactly what I was looking for. By the way I read the regs, this is what I think too but maybe I need to ask my accountant about this one.... would hate to be wrong and have to pay a 10% penalty on the entire thing if timing not correct.
 
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