How To Redeposit COVID Refunds Into A 529 Account
Many parents are excited about the money they’ll be receiving back from colleges after semesters were cut short. Unfortunately, this college refund won’t be tax-free. In order to save the amount from tax, one of the best approaches is to deposit the refund into a 529 plan.
It’s important that you deposit the amount immediately and at least 60 days prior to when you’ll claim the tax benefits. There are certain guidelines and rules that you’ll need to follow strictly while re-depositing COVID refunds into a 529 account. Keep reading to learn about them.
What To Consider?
There are a number of things to consider while re-depositing the funds into the 529 plan which includes:
- The unused amount has to be re-deposited within a limited time period of 60 days
- You have to include all the proper details regarding the re-contribution to the account
- Keep the details safe so that you can show them during the IRS audit and other tax preparations
Thinking of how you can meet these conditions? Here are some of the useful ways that can help you in meeting these conditions while re-depositing the refund from the college into the savings account.
- Re-deposit the refund amount to the same account of the beneficiary from which it has been used within 60 days
- You can re-deposit the returned funds into another 529 account with the same beneficiary within a time period of 60 days
- Make sure to use this re-deposited amount for a qualified higher education for the beneficiary within the same tax year
- You can also use this amount for the siblings of the beneficiary
- If you put it in the bank, you’ll have to pay penalties and other federal and state taxes
The Tax Implications
The main purpose of keeping funds in this special account type is to cover higher education costs in a tax-free manner.
Today, the cost of higher education is constantly increasing which makes planning in advance even more important. The 529 account offers you the perfect solution in this context. Hence, if you’re getting money back from the college, re-deposit it into your 529 plan and make sure that you are using it the right way.
The person whose fee has been refunded could likely be taking admission in some other courses too. You can use the returned amount to pay for the fees of that particular course within the same tax year. Moreover, this amount can be used to pay the education cost of the siblings of the beneficiary.
Receiving this money back into your bank account will provide you with a number of tax implications such as paying state and federal taxes. Also, you may have to pay a penalty if you are audited by the IRS.
The 60-Day Clock
While you’re re-depositing the refund amount from the college, it’s important to take care of the 60-day clock. This 60-day clock starts from the date when the college initiated the refund of the fees. Therefore, you should make sure that the amount goes directly into the beneficiary’s 529 from the very beginning.
There are different ways you can re-deposit the money to your account. For example, there are some states where the account is being managed by colleges and universities. In this case, you can ask the college itself to reimburse the amount directly into the plan. In other cases, you should write a check immediately to transfer the amount to the corresponding 529 account.
While you are proceeding with the re-deposit, make sure to consider all the details related to the deposit. Some of them are:
- The date of the refund
- A statement backed up by a receipt copy from the college proving it’s a repayment from college
- The date of deposit
- The school name
- The amount of deposit
- The date when the original amount was withdrawn for the course
- The name of the beneficiary for the account
Everyone can appreciate receiving money back from college, especially during this tough pandemic. However, not planning for it can lead to a tax impact. Re-depositing the refunded amount into the 529 account can help you avoid any tax implications. Just make sure to follow the proper procedures of the re-deposit and ensure it is properly documented for the IRS.