529 withdrawal

[2025 hopeful]

Just thought I would mention a thought before folks start taking money out of 529s. From a planning perspective, I would be careful until your DD or DS gets further along in their academy. Spouse had a close friend that was not able to finish at USCGA because of a skiing injury. He had to complete 2 years at another university. I'm sure it's unusual, but it does happen.

 

[USMA*DAD*2026]

HI All,

My two cents..

1. Its best withdraw your 529 every year ( upto 0% tax bracket- depends on how mush you have in 529 ) As suggested above that can go to Roth IRA and or to Savings ( Stocks/ Mutual funds? or just cash sitting with DS/DD account)

2. Not sure if this can be done. First year Federal Government gives loan for Computer/Uniforms/books... many items part of education requirements to the Cadets. which is deducted out of monthly stipend. Can our 529 pay that loan affront through cadet account ? and get accounted as educational expenses ?

I will check with My CPA on this as year progresses.

 

[Don't Give Up the Ship]

As mentioned early in this thread, USNA will accept up to $17,500 from a 529. See here: https://www.usna.edu/quicklinks/disbursing.php

 

[VelveteenR]

From a planning perspective, I would be careful until your DD or DS gets further along in their academy. Spouse had a close friend that was not able to finish at USCGA because of a skiing injury. He had to complete 2 years at another university. I'm sure it's unusual, but it does happen.

This is very important. No one has a crystal ball. Cadets/mids separate for many reasons, and you will want to have enough in that 529 to help them finish out their education at a civilian college if that becomes necessary. The general advice is to withdraw a quarter of the funds per year or leave them untouched until the student has tossed their hat into the air.

 

[rheaton13]

When you do your taxes (I use Turbo Tax) make sure you designate your Mid as the beneficiary. We distributed our to our son and he applied it to his internal account for expenses. No penalties were applied when we did it this way.

 

[DrewLM]

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?

My understanding is that the $17500 is an allowable education expense for 529 plans, so you do not need to pay taxes or penalties if you withdraw it and pay to the academy. Be sure to keep records showing that the academy received it for expenses, in case you are ever audited.

If you just withdraw $17500 and give it to your kid, you will owe taxes on the capital gains.

 

[DrewLM]

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?

If you pay it to the academy, it is an allowable education expense (up to $17500), so you don't need to pay taxes on the capital gains.

 

[HopefulDad2026]

My understanding is that the $17500 is an allowable education expense for 529 plans, so you do not need to pay taxes or penalties if you withdraw it and pay to the academy. Be sure to keep records showing that the academy received it for expenses, in case you are ever audited.

If you just withdraw $17500 and give it to your kid, you will owe taxes on the capital gains.

Not from what I’ve researched and read here. I’m not a tax expert though so I’d just advise everyone to double check on this with their tax advisor.

 

[VelveteenR]

Yes, please check because some of the rules have changed. For instance, 529 funds can now be used for secondary school education but couldn’t when our son was in high school. During our son’s time at USMA, the service academies were not considered 529-eligible institutions as they don’t charge tuition, so that was why the Military Family Tax Relief Act absolved SA families of any penalty (besides taxes on the gains) for non-education withdrawal. I’m not aware that this has changed, but you should check.

 

[St.Katherine]

Quick question. Has anyone dealt with the nuts and bolts of how this works when you do your, or your cadet's/midshipmen's taxes. Is TurboTax smart enough to ask if your child is attending a service academy when you put the 1099Q info in? Thanks

TurboTax works for me since 1996.
It’s very very very user friendly. Type data, click enter, submit to IRS… $$ deposited to your big bank in the sky 21-days later.

 

[SpiritCommitteeLiaison]

You can go to the USAFA FAQ under Financial to get information about how to use the 529s

www.usafa.edu/parents/faq/

This is what it says:

First, check with your individual state regarding Educational 529s/EE bonds, as each state adheres to different rules. Cadet Pay cannot accept checks or bonds directly from an investment business. Cadets or parents must cash the checks or bonds first and then write a personal check payable to: “US TREASURY” and mail to: HQ USAFA/FMF, 2304 Cadet Drive, Suite 2200, USAF Academy, CO 80840-5035. It is recommended that the cadet’s full name and social security number be annotated in the memo line of the check. For questions, call 719-333-6988 OR 6982.

 

[camo-it]

USMA currently values the education at $243,826. Therefore, a 529 could be withdrawn up to that amount without the 10% penalty and only taxed on the gains. DD wants to save the funds for her kids (I understand I keep the 529 and just change beneficiaries). However, say there are no grandkids in 20 yrs and she wants the $ for something else. Can the $ be pulled out at a later date without the 10% penalty and still just the same tax scenario, albeit in a higher tax bracket? And I assume the amount that would be exempt from the 10% could only be up to the amount when she was at West Point ($243k)? Any and all thoughts appreciated?

 

[AROTC-dad]

Can the $ be pulled out at a later date without the 10% penalty and still just the same tax scenario, albeit in a higher tax bracket? And I assume the amount that would be exempt from the 10% could only be up to the amount when she was at West Point ($243k)?

IRS Publication 970 does not state any limits apply to the exception regarding 529 plans and Service Academies. Just because there is no stated limit, does not mean that the IRS could apply one 20 years from now.

Here is the excerpt from IRS Pub. 970: (italics and bold face are mine).

Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you must also pay a 10% additional tax on the amount included in income.

Exceptions. The 10% additional tax doesn't apply to the following distributions.

• 1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.
• 2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.
• 3. Included in income because the designated beneficiary received: a. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1); b. Veterans' educational assistance (see Veterans' Benefits in chapter 1); c. Employer-provided educational assistance (see chapter 10); or d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. This exception applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.
• 4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.
• 5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier).
• 6. Made before June 1, 2022, of an excess 2021 contribution (and any earnings on it). The distributed earnings must be included in gross income for the year in which the excess contribution was made.

 

[camo-it]

IRS Publication 970 does not state any limits apply to the exception regarding 529 plans and Service Academies. Just because there is no stated limit, does not mean that the IRS could apply one 20 years from now.

Here is the excerpt from IRS Pub. 970: (italics and bold face are mine).

Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you must also pay a 10% additional tax on the amount included in income.

Exceptions. The 10% additional tax doesn't apply to the following distributions.

• 1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.
• 2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.
• 3. Included in income because the designated beneficiary received: a. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1); b. Veterans' educational assistance (see Veterans' Benefits in chapter 1); c. Employer-provided educational assistance (see chapter 10); or d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. This exception applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.
• 4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.
• 5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier).
• 6. Made before June 1, 2022, of an excess 2021 contribution (and any earnings on it). The distributed earnings must be included in gross income for the year in which the excess contribution was made.

Thank you!