529 distribution timing

Forum|Forum|5 years ago
February 8, 2021
1 reply
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We requested a 529 distribution on December 31 2020, and the transaction wasn't processed until January of 2021, and Fidelity will issue a 2021 1099-Q. The beneficiary graduated in December and doesn't have any qualified expenses in 2021. We have in the past matched expenses and distributions to the same calendar year as a best practice, but I can't find any guidance requiring it, or defining when a distribution actually occurs.

How risky is it to consider that the distribution occurred in 2020, since that was when it was requested? And if we took that position, how would we deal with the 2020 tax return without a 1099-Q and a 2021 return with a 1099-Q and no expenses? Fidelity won't issue a 2020 1099-Q. I am concerned that if I ignore it in 2021 we will get flagged.

Alternatively, I have a short amount of time where I think I could rollover the money to 529 for another beneficiary - we have no other kids, but if I rolled it into a 529 for me could my child use it for graduate school even if I am the beneficiary? This is not as financially favorable, as I think the income would count against him for financial aid for grad school, right?

ColeenD3

No, you are stuck unfortunately. The IRS is very clear that the distribution and the tuition expense must occur in the same year. You can't be the beneficiary and let your child use the distribution. And yes, it would count against any possible Education Credit.

Distributions used to pay for college expenses for anyone other than the designated beneficiary will be considered non-qualified, and subject to income tax and a 10% penalty on the earnings portion and possible recapture of state income tax benefits.

529 Beneficiary