facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

Getting A College Tuition or Room & Board Refund? Here Are The Options With Your 529 Plan

The COVID-19 outbreak has led to the closure of most colleges and universities, with classroom learning moving completely online.  As a result, many institutions are issuing refunds for tuition and/or room and board fees.  If you previously paid these college expenses with a 529 plan, you are able to return the money to the 529 plan and avoid the taxes and penalty on the refund.

Recontribution steps with your 529 Plan

Thanks to the Protecting Americans from Tax Hikes (PATH) Act of 2015, you can recontribute the refund back into your 529 account. Keep in mind the following to navigate the recontribution process:

  • The refunded amount must deposited within 60 days of the issuance of the refund. The amount of the recontribution cannot exceed the refunded amount. If it does, the excess is treated as a 529 plan contribution.
  • The refund must be deposited into a 529 account for the same beneficiary. It does not necessarily have to be deposited to the same plan that it was originally deposited. 
  • The full recontribution amount is treated as principal versus a combination of principal and capital appreciation. 
  • Keep a paper trail of the refund check (or ACH) and the recontribution amount and deposit date. Sending a physical check to the 529 plan is suggested for paper trail purposes and note in the check memo that the purpose is for 529 plan recontribution due to 2020 college refund. Sending the check via certified or registered mail to verify that is meets the 60-day window is also a good move. 

 What happens if the refund is not recontributed?

If your refund is not recontributed back into the beneficiary’s 529 plan, it is considered a non-qualified distribution. Therefore, the earnings part of the distribution is subject to income tax at the beneficiary’s rate PLUS a 10% tax penalty.  

Also, if the refund is not recontributed within 60 days of the refund being issued, the IRS can treat the refund as income and there be tax and penalty consequences. 

Hopefully our college students will return to the classroom safely much sooner rather than later.