Due to the outbreak of COVID-19, many colleges, universities and private secondary schools have shut their doors and transitioned to online learning. As a result, many families have received or will receive partial refunds of educational expenses, including money paid for tuition and/or room and board. If you originally paid these expenses using distributions from a 529 College Savings Plan (529 Plans), this refund could come with unexpected tax consequences if action is not taken to prevent it.

A 529 plan is a fantastic tool for funding educational costs. When used properly (i.e. used to pay for qualifying educational costs), the 529 Plan offers investment growth and distributions that are Federally tax-free. If used improperly (i.e. distributions are used for non-qualifying costs), the Internal Revenue Service (IRS) can recharacterize the distribution as a taxable distribution, requiring the taxpayer to not only include the earnings portion of the distribution in their gross income, but to also pay a 10% penalty on the earnings.

Since these refunds are no longer being used to pay for qualified educational expenses, the IRS views the original 529 distribution as a non-qualified distribution and the aforementioned tax consequences could apply.

You have two options with which you can use your refund:

• Apply the funds to a qualified higher educational expense during the same calendar year; or
• Place the funds back into your 529 account by the July 15, 2020 date (if you received a tuition refund after February 1, 2020).

Under normal circumstances, the IRS provides taxpayers 60 days to re-contribute non-qualified 529 distributions. Given the current extenuating circumstances and since COVID-19 has caused many taxpayers to inadvertently take non-qualified distributions, on April 9th, 2020 the IRS has extended the 60-day re-contribution window to July 15, 2020.

As such, if you received a tuition refund after February 1, 2020, you have until July 15, 2020 to re-contribute the funds  to the 529 Plan that originally disbursed the funds. By doing this, you will avoid the negative tax ramifications.

If you paid your tuition with a 529 distribution and your school has elected to credit your tuition payment to the next semester, there is no action required by you.

Since 529 Plans are maintained by the individual states, the re-contribution process differs across state providers. If you receive a refund, we encourage you to work with your GW & Wade Counselor or your accountant to determine the best way to re-contribute your funds. Please feel free to contact us here anytime with any questions.

Investment advisory services offered through GW & Wade, LLC.

The information above is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change. Information is as of the date of publication. GW & Wade cannot guarantee that this information is accurate, complete, or timely. We make no warranties with regard to such information or results obtained by its use. Always consult an attorney or tax professional regarding your specific situation.

Clients of the firm who have specific questions should contact the GW & Wade Counselor with whom they regularly work. All other inquiries, including any inquiry concerning a potential advisory relationship with GW & Wade, should be directed to:

Laurie Wexler Gerber, Director of Marketing
GW & Wade, LLC
781-239-1188
lgerber@gwwade.com