As the season drifts into fall, college is in full session. You’ve already covered your child’s qualified higher education expenses, including tuition, through payments from your CollegeAdvantage 529 Plan. However, your child has now decided to drop a class. Because it’s too late to join a new course, the college has sent you a refund check. As you took the money out of your Direct 529 plan, you would like to place the refund into it to continue the 529 tax advantages as well as to avoid any potential tax ramifications as the returned funds could now be considered part of your income if not re-deposited. Additionally, you are concerned that the original transaction could now be treated as a non-qualified withdrawal because the funds are no longer being used to cover qualified higher education expenses.
Thanks to new regulations established by the Protecting Americans from Tax Hikes (PATH) Act in 2015, you can recontribute those funds to your Direct 529 account. There are some guidelines to follow including: 1) The refunded amount must re-deposited within 60 days of the issuance of the refund; and 2) it must be deposited into a qualified 529 account. As the account owner, you must keep track of all the records showing the date of the refund from the eligible educational institution and then its re-contribution into the 529 plan. Additionally, you will need to maintain all documentation linking the re-contribution to the refund from the eligible educational institution. You are responsible to make sure this transaction meets the Internal Revenue Service (IRS) requirements and is in good order.
As you deposit the refund, you must notify OTTA that it is a re-contribution of previously withdrawn funds and the refunded amount is compliant with 60-day deadline. The notification to OTTA must include a letter of instruction signed by you detailing the account number of the 529 account from which the withdrawal was initiated along with the date and amount of the withdrawal. If these steps are not followed, the amount will be treated as a normal contribution and thus the original withdrawal may be considered a non-qualified withdrawal by the IRS. You should consult your tax advisor regarding the tax implications of any refunds and/or re-contributions.
Here are the steps to follow:
Direct 529 Plan Re-contribution
You must mail in a check as the re-contribution. Make sure to include the account number.
- If under $10,000, you can endorse the schools refunded check and make it payable to OTTA.
- If great than $10,000, you will need to cash the refund check, and then send OTTA a personal check for the re-contribution.
Guaranteed 529 Plan Re-contribution
The refund from the school CANNOT be re-contributed into the Guaranteed 529 account, because this plan has been closed to contributions since the end of 2003.Therefore, the refund must be deposited into a College Advantage Direct 529 Plan or College Advantage Advisor 529 Plan.
You must mail in a check as the re-contribution. Make sure to include the original Guaranteed account number as well as the already established Direct or Advisor account number.
- If under $10,000, you can endorse the schools refunded check and make it payable to OTTA.
- If great than $10,000, you will need to cash the refund check, and then send OTTA a personal check for the re-contribution.
If you do not have a CollegeAdvantage Direct 529 Plan, you can use your re-contribution from the Guaranteed 529 account to establish a Direct 529 account with OTTA.
Again, remember that the re-contribution must be deposited back into the 529 plan account within 60 days of the refund being issued. Otherwise, the IRS may consider the refund to be part of your income and there may tax consequences. The IRS could also treat the original withdrawal as a non-qualified withdrawal and there could be tax consequences on the first transaction as well. Consult with your tax advisor regarding the tax implications of any refunds and/or re-contributions.
