529 withdrawal

Thank you! I will try to remember to re-post on here when that is communicated for future reference.
 
tecolote said:
I have read many posts on various Academy sites but am curious whether anyone has completely withdrawn their cadet's 529 funds while they can.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 we consider doing so before the law changes and disallows a full withdrawal without penalty.
TIA.
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It would seem as though the guidance is really lacking in this area and after reviewing the information, it would seem that most are guessing.

My daughter is at USNA and no where can I find an estimate of value of the cost of the education that the IRS requires us to have to document withdrawals. The other aspect is that as we have asked questions, we keep getting told that the military academies are not considered eligible institutions. For consideration as a qualified expense, it has to be for expenses incurred at an eligible learning institution. We have gone to tax attorneys, CPAs, USNA and also the IRS and it is really deer in the headlights.

Who can someone recommend that these questions can be referred to?
 
USAFA sent us a “Cost of Education” letter around tax time. I’m not sure if USNA does.

Also, it’s only necessary to post in one thread with a question.

Stealth_81
 
https://www.savingforcollege.com/ar...contributions-from-a-529-plan-without-penalty

Exceptions to the penalty​

In some cases, the 10% penalty on non-qualified distribution is waived, but the earnings portion of the distribution is still subject to ordinary income tax. These exceptions include:

  • When the 529 plan beneficiary dies or becomes disabled
  • When the beneficiary receives a tax-free scholarship
  • When the beneficiary receives educational assistance through a qualifying employer program
  • When the beneficiary attends a U.S. Military Academy
  • The qualified education expenses were used to justify another federal education tax benefit, such as the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit

I have not researched the underlying law for this, but it is the same information I received from my CPA.
 
ETM said:
It would seem as though the guidance is really lacking in this area and after reviewing the information, it would seem that most are guessing.

Who can someone recommend that these questions can be referred to?
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IRS Pub. 970, page 62 of the 2020 version. Item #4. A 529 is a QTP, as evidenced on page 59. Straight from the horse's mouth, so to speak.
 
T-37IP said:
https://www.savingforcollege.com/ar...contributions-from-a-529-plan-without-penalty

Exceptions to the penalty​

In some cases, the 10% penalty on non-qualified distribution is waived, but the earnings portion of the distribution is still subject to ordinary income tax. These exceptions include:

  • When the 529 plan beneficiary dies or becomes disabled
  • When the beneficiary receives a tax-free scholarship
  • When the beneficiary receives educational assistance through a qualifying employer program
  • When the beneficiary attends a U.S. Military Academy
  • The qualified education expenses were used to justify another federal education tax benefit, such as the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit

I have not researched the underlying law for this, but it is the same information I received from my CPA.
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https://www.irs.gov/pub/irs-pdf/p970.pdf Link to source
 
ORD 9C/27C said:
@Stealth_81, How is the cost communicated? Meaning, is there a document? Thanks
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We (parents) received a letter from USAFA with the information in it, along with other tax information about claiming your cadet, etc. We also got the information shared to us by our state parent association. Remember, that was 14 years ago and it may be electronic now. Either way, they will let you know.

Stealth_81
 
I suggest starting a new thread; 529s, scholarships, and taxes come up every year and is a great topic.

Specifically for the cost of attendance:
If you accepted your appointment
Facebook: USAFA Parent Resource, under Files tab. Look back to July 2020/Oct 2020
Other info: Parent Handbook and USAFA.EDU/Parents/Frequently Asked Questions/Financial Information - all links

If you are a candidate/simply interested:
Google "US Air Force Academy Cadet Scholarship and Investment Plan Proceeds" and you should be able to find one from a recent year. Dollar amounts are in that range.
 
After reading this thread, other threads, the USNA 20/21 Budget Book and several other sources, I've compiled my notes into a set of bullets that I'm posting here, in hopes that it will help some of you, and others may correct me:

I looked into paying off the ACE loan ($8500) and "future issued items" ($9000) with 529 Plan funds and here is what I found:
  • It is acceptable, easy, and standard to get a distribution of $17,500 from your 529 plan to pay off the ACE loan and future costs (See p. 1 of the 2020/21 Budget Book.)
    • USNA can/will accept the 529 Plan $s up to graduation day
  • Paying off the ACE loan won't change your End of Month pay until November of your sophomore year
    • The ACE loan is a 0% interest loan (p. 1)
    • The repayments of your ACE loan are deducted from your Held Pay, not your monthly pay.
    • It isn't until November of your 3/C year that there is a release from your Held Pay to your bank account. (p. 2)
      • The amount released depends on how much you have in your Held Pay (p. 7)
      • The more money in your Held Pay, the more money is released (but they don't release all of it)
      • See pp 13 and 15 in the Budget Book
  • The cost of any "future issued items" comes out of your Held Pay, also (p. 1)
    • So, if we pay $9K to USNA for these, then it goes into your Held Pay, not your monthly pay
    • Every November, February, and July you get additional cash from your Held Pay in the form of Mass Held Pay (see p 3 of your Budget Book)
    • The remainder of any Held Pay will be disbursed to you upon graduation. (p. 3)
  • If you leave USNA for any reason before your ACE loan is repaid, then you don't have to reimburse USNA for any amount you still owe
    • You are taxed on the amount forgiven as income (p. 7)
    • The ACE loan is paid off in August before your senior year (p. 11)
So, it makes the most sense to request the $17,500 distribution from the 529 plan in August 2024 (start of senior year), after your ACE loan is paid off.
  • No matter when the 529 distribution is added to your Held Pay, you won't receive any of it until November of your sophomore year
    • Then will only receive part of it
  • Waiting until senior year maximizes the amount of time that the 529 investment can grow
  • The ACE loan is a 0% loan, so no benefit to paying off early
  • If you pay it off early, you will lose free money if you separate for any reason before your senior year
If you need money sooner, the soonest that you will get any of it will be in November of your sophomore year.
 
DrewLM said:
After reading this thread, other threads, the USNA 20/21 Budget Book and several other sources, I've compiled my notes into a set of bullets that I'm posting here, in hopes that it will help some of you, and others may correct me:

I looked into paying off the ACE loan ($8500) and "future issued items" ($9000) with 529 Plan funds and here is what I found:
  • It is acceptable, easy, and standard to get a distribution of $17,500 from your 529 plan to pay off the ACE loan and future costs (See p. 1 of the 2020/21 Budget Book.)
    • USNA can/will accept the 529 Plan $s up to graduation day
  • Paying off the ACE loan won't change your End of Month pay until November of your sophomore year
    • The ACE loan is a 0% interest loan (p. 1)
    • The repayments of your ACE loan are deducted from your Held Pay, not your monthly pay.
    • It isn't until November of your 3/C year that there is a release from your Held Pay to your bank account. (p. 2)
      • The amount released depends on how much you have in your Held Pay (p. 7)
      • The more money in your Held Pay, the more money is released (but they don't release all of it)
      • See pp 13 and 15 in the Budget Book
  • The cost of any "future issued items" comes out of your Held Pay, also (p. 1)
    • So, if we pay $9K to USNA for these, then it goes into your Held Pay, not your monthly pay
    • Every November, February, and July you get additional cash from your Held Pay in the form of Mass Held Pay (see p 3 of your Budget Book)
    • The remainder of any Held Pay will be disbursed to you upon graduation. (p. 3)
  • If you leave USNA for any reason before your ACE loan is repaid, then you don't have to reimburse USNA for any amount you still owe
    • You are taxed on the amount forgiven as income (p. 7)
    • The ACE loan is paid off in August before your senior year (p. 11)
So, it makes the most sense to request the $17,500 distribution from the 529 plan in August 2024 (start of senior year), after your ACE loan is paid off.
  • No matter when the 529 distribution is added to your Held Pay, you won't receive any of it until November of your sophomore year
    • Then will only receive part of it
  • Waiting until senior year maximizes the amount of time that the 529 investment can grow
  • The ACE loan is a 0% loan, so no benefit to paying off early
  • If you pay it off early, you will lose free money if you separate for any reason before your senior year
If you need money sooner, the soonest that you will get any of it will be in November of your sophomore year.
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Thank you for this. We have gone back and forth trying to decide whether to do this. This is helpful info.
 
DrewLM said:
After reading this thread, other threads, the USNA 20/21 Budget Book and several other sources, I've compiled my notes into a set of bullets that I'm posting here, in hopes that it will help some of you, and others may correct me:

I looked into paying off the ACE loan ($8500) and "future issued items" ($9000) with 529 Plan funds and here is what I found:
  • It is acceptable, easy, and standard to get a distribution of $17,500 from your 529 plan to pay off the ACE loan and future costs (See p. 1 of the 2020/21 Budget Book.)
    • USNA can/will accept the 529 Plan $s up to graduation day
  • Paying off the ACE loan won't change your End of Month pay until November of your sophomore year
    • The ACE loan is a 0% interest loan (p. 1)
    • The repayments of your ACE loan are deducted from your Held Pay, not your monthly pay.
    • It isn't until November of your 3/C year that there is a release from your Held Pay to your bank account. (p. 2)
      • The amount released depends on how much you have in your Held Pay (p. 7)
      • The more money in your Held Pay, the more money is released (but they don't release all of it)
      • See pp 13 and 15 in the Budget Book
  • The cost of any "future issued items" comes out of your Held Pay, also (p. 1)
    • So, if we pay $9K to USNA for these, then it goes into your Held Pay, not your monthly pay
    • Every November, February, and July you get additional cash from your Held Pay in the form of Mass Held Pay (see p 3 of your Budget Book)
    • The remainder of any Held Pay will be disbursed to you upon graduation. (p. 3)
  • If you leave USNA for any reason before your ACE loan is repaid, then you don't have to reimburse USNA for any amount you still owe
    • You are taxed on the amount forgiven as income (p. 7)
    • The ACE loan is paid off in August before your senior year (p. 11)
So, it makes the most sense to request the $17,500 distribution from the 529 plan in August 2024 (start of senior year), after your ACE loan is paid off.
  • No matter when the 529 distribution is added to your Held Pay, you won't receive any of it until November of your sophomore year
    • Then will only receive part of it
  • Waiting until senior year maximizes the amount of time that the 529 investment can grow
  • The ACE loan is a 0% loan, so no benefit to paying off early
  • If you pay it off early, you will lose free money if you separate for any reason before your senior year
If you need money sooner, the soonest that you will get any of it will be in November of your sophomore year.
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My understanding is that whether or not you send it to the academy or give it to your DS/DD as a straight withdrawal, the DS/DD will have to pay the taxes on the gains in the 529 account. The additional 10% is waived regardless.

So my question would be why even send any of the money to USNA?

Our plan at this point is to withdraw 1/4 of the balance each year and first, fully fund a Roth IRA for $6k or whatever the limit is now, and then the rest can just go into standard stock accounts/bank accounts.

Would be curious of your thoughts on that?
 
HopefulDad2026 said:
So my question would be why even send any of the money to USNA?

Our plan at this point is to withdraw 1/4 of the balance each year and first, fully fund a Roth IRA for $6k or whatever the limit is now, and then the rest can just go into standard stock accounts/bank accounts.

Would be curious of your thoughts on that?
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Minus taxes on the gain, you may use the money as you see fit. We did not use any of it for education. For us, it funded early(er) retirement.
 
VelveteenR said:
Minus taxes on the gain, you may use the money as you see fit.
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Yep, my take too, and my son has his plan. Was more wondering if there is really any benefit to running it through USNA? It doesn't seem so to me.

In simple terms to me for the $17500, it seems like, my DS can have the cash now, or he can give it to USNA and they can give it back to him later. Not sure why one would do that?
 
VelveteenR said:
Minus taxes on the gain, you may use the money as you see fit. We did not use any of it for education. For us, it funded early(er) retirement.
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So there is no penalty for taking the money out of the 529 since they are at USNA except for paying taxes on the gain?
 
I think that you can only take out an amount equivalent to the scholarship or equivalent cost of the education for that year. So, if you have a significant amount in your child's 529 (more than the equivalent cost of one year at USNA), then I believe you need to spread out that withdrawal over multiple years that they are attending USNA in order not to be hit with a penalty for the amount greater than the cost of 1 year's education. I still do not see any reason to divert it through USNA, but depending on how much you have saved in the 529, you might not want to wait until the last year to start withdrawals.
 
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