How long does a deposit have to sit in a DC 529 account to get the tax break?

[Anonymous]

Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

[Anonymous]

I think it’s only -0-15 days or sometiing

[Anonymous]

You get the deduction immediately. but if you roll-over within 2 years, the DC tax deduction is recaptured.

https://www.dccollegesavings.com/home/faqs.html#collapseare-there-any-special-tax-benefi

[Anonymous]

Anonymous wrote:You get the deduction immediately. but if you roll-over within 2 years, the DC tax deduction is recaptured.

https://www.dccollegesavings.com/home/faqs.html#collapseare-there-any-special-tax-benefi

We do this every year- make a contribution, then a few weeks later, roll it over to our Vanguard 529. The money doesn't have to sit for any specified amount of time as long as THE ACCOUNT is more than 2 years old.

"If an account owner makes a non-qualified distribution or certain transfers or rollovers to another state’s program within 2 years of opening the account, the amount of the deduction may be "recaptured" and included in the account owner’s DC income."

[Anonymous]

Anonymous wrote:Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

You can deduct up to $8000 per year (for a married couple), not $8800.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

You can deduct up to $8000 per year (for a married couple), not $8800.

Good catch. Also, OP, you probably know this, but you can't quite do all these things quite this fast. IF you redeem the I-Bonds, it usually takes around 2 (or maybe 3 sometimes) business days for the cash to hit your bank account. Then if you immediately do the 529 transaction that day, it will take another business day or two for the funds to be registered as deposited/settled into the 529 account. So I would give at least a week to actually execute all this, and probably a bit more than that if you get caught on a weekend somewhere in there.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

You can deduct up to $8000 per year (for a married couple), not $8800.

Yup, thanks for clarifying PP - that was a typo.

[Anonymous]

Anonymous wrote:

Anonymous wrote:You get the deduction immediately. but if you roll-over within 2 years, the DC tax deduction is recaptured.

https://www.dccollegesavings.com/home/faqs.html#collapseare-there-any-special-tax-benefi

We do this every year- make a contribution, then a few weeks later, roll it over to our Vanguard 529. The money doesn't have to sit for any specified amount of time as long as THE ACCOUNT is more than 2 years old.

"If an account owner makes a non-qualified distribution or certain transfers or rollovers to another state’s program within 2 years of opening the account, the amount of the deduction may be "recaptured" and included in the account owner’s DC income."

Great info - thanks PP!

- OP

[Anonymous]

Anonymous wrote:

Anonymous wrote:You get the deduction immediately. but if you roll-over within 2 years, the DC tax deduction is recaptured.

https://www.dccollegesavings.com/home/faqs.html#collapseare-there-any-special-tax-benefi

We do this every year- make a contribution, then a few weeks later, roll it over to our Vanguard 529. The money doesn't have to sit for any specified amount of time as long as THE ACCOUNT is more than 2 years old.

"If an account owner makes a non-qualified distribution or certain transfers or rollovers to another state’s program within 2 years of opening the account, the amount of the deduction may be "recaptured" and included in the account owner’s DC income."

This doesn't make sense for a variety of reasons.
1. IRS rules (not DC and non-negotiable) say one tax-free rollover per beneficiary every 12-month period. Unless you only have one plan for each kid, what you are doing is NOT tac free for at least one of your accounts.
2. DC 529 has a fee for account balances less than $15k (I forget the actual #). There is no economic argument for paying a fee if you can avoid it by leaving small amounts in your DC account

Please don't take financial advice from DCUM!!!

[Anonymous]

Anonymous wrote:

Anonymous wrote:Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

You can deduct up to $8000 per year (for a married couple), not $8800.

While true, many people in 2 income DC households are better off filing Married Filing Separately on Same Return. In that case you can take only $4k in deductions (although you can carry forward unused deductions for a number of years. The delta between this filing and MFJ saves me and spouse many thousands annually.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

You can deduct up to $8000 per year (for a married couple), not $8800.

While true, many people in 2 income DC households are better off filing Married Filing Separately on Same Return. In that case you can take only $4k in deductions (although you can carry forward unused deductions for a number of years. The delta between this filing and MFJ saves me and spouse many thousands annually.

We file as "Married Filing Separately". You can allocate $4000 to each spouse even filing that way. It's still $8000 for a couple.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

You can deduct up to $8000 per year (for a married couple), not $8800.

While true, many people in 2 income DC households are better off filing Married Filing Separately on Same Return. In that case you can take only $4k in deductions (although you can carry forward unused deductions for a number of years. The delta between this filing and MFJ saves me and spouse many thousands annually.

We file as "Married Filing Separately". You can allocate $4000 to each spouse even filing that way. It's still $8000 for a couple.

2 things:

1. MFS will in almost every situation yield the highest tax liability as between the 3 married options under discussion. No way the deduction on the 4k makes it worthwhile
2. Ibid on the maintenance fee for emptying the DC account
3. IRS transfer limit is per beneficiary regardless of how many accounts they have

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:You get the deduction immediately. but if you roll-over within 2 years, the DC tax deduction is recaptured.

https://www.dccollegesavings.com/home/faqs.html#collapseare-there-any-special-tax-benefi

We do this every year- make a contribution, then a few weeks later, roll it over to our Vanguard 529. The money doesn't have to sit for any specified amount of time as long as THE ACCOUNT is more than 2 years old.

"If an account owner makes a non-qualified distribution or certain transfers or rollovers to another state’s program within 2 years of opening the account, the amount of the deduction may be "recaptured" and included in the account owner’s DC income."

This doesn't make sense for a variety of reasons.
1. IRS rules (not DC and non-negotiable) say one tax-free rollover per beneficiary every 12-month period. Unless you only have one plan for each kid, what you are doing is NOT tac free for at least one of your accounts.
2. DC 529 has a fee for account balances less than $15k (I forget the actual #). There is no economic argument for paying a fee if you can avoid it by leaving small amounts in your DC account

Please don't take financial advice from DCUM!!!

Fair point, I wouldn't take financial advice from you:

1. I know the 12 month rollover limitation. Because of that our rollover date creeps forward a bit each year. We started in January years ago and do it in March now. Every year it goes forward about 10 days- I send the form in the day after Vanguard says it received the funds the year before. I also properly report it all on my DC and federal taxes properly. And yes we have separate plans for each kid.

2. If you actually check the DC plan webpage, the fee is $10/account/year for DC residents, no matter the amount in the account.

https://www.dccollegesavings.com/home/faqs.htm

"What are the fees associated with the DC College Savings Plan?
The DC College Savings Plan has no commissions, loads, or sales charges. The total annual asset-based fee varies from 0.15% to 0.80%, depending on the Portfolio you choose. Each account is also subject to an Annual Maintenance Fee of $10 for DC Residents and $15 for non-DC residents."

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Hi there DCUM, could use the hive mind here.

Here is my situation - DD is a rising senior. We are DC residents, and have emptied out our DC 529 account to pay for the first 3 years of college, and have savings accounts and I Bonds to pay for senior year.

Contributions to the DC 529 are deductible on our DC taxable income, up to $8,800 per year. If I cash out the IBonds, and then deposit those into a DC 529, is there a certain amount of time they have to sit in the account before they are deductible? Can I cash out the IBonds on September 1, deposit them into the DC529 account on September 2, and then use the DC529 to pay the tuition bill on September 3 and still get the tax break? Or do I have to let those funds sit in the account for a certain amount of time?

Thanks for your input!

You can deduct up to $8000 per year (for a married couple), not $8800.

While true, many people in 2 income DC households are better off filing Married Filing Separately on Same Return. In that case you can take only $4k in deductions (although you can carry forward unused deductions for a number of years. The delta between this filing and MFJ saves me and spouse many thousands annually.

We file as "Married Filing Separately". You can allocate $4000 to each spouse even filing that way. It's still $8000 for a couple.

2 things:

1. MFS will in almost every situation yield the highest tax liability as between the 3 married options under discussion. No way the deduction on the 4k makes it worthwhile
2. Ibid on the maintenance fee for emptying the DC account
3. IRS transfer limit is per beneficiary regardless of how many accounts they have

Actually 2 things:

1. Our software shows the difference in tax liability because we can toggle between MFJ and MFS for DC taxes (we MFJ for federal). It is always more tax due if we MFJ for DC taxes. I believe this has been identified as a common issue for dual earner households.

https://www.reddit.com/r/washingtondc/comments/1azmvo7/psa_taxes_if_married/

2. Two and Three were already addressed in previous post. It's worth $20 in annual maintenance fees for a $700 DC tax benefit.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:You get the deduction immediately. but if you roll-over within 2 years, the DC tax deduction is recaptured.

https://www.dccollegesavings.com/home/faqs.html#collapseare-there-any-special-tax-benefi

We do this every year- make a contribution, then a few weeks later, roll it over to our Vanguard 529. The money doesn't have to sit for any specified amount of time as long as THE ACCOUNT is more than 2 years old.

"If an account owner makes a non-qualified distribution or certain transfers or rollovers to another state’s program within 2 years of opening the account, the amount of the deduction may be "recaptured" and included in the account owner’s DC income."

This doesn't make sense for a variety of reasons.
1. IRS rules (not DC and non-negotiable) say one tax-free rollover per beneficiary every 12-month period. Unless you only have one plan for each kid, what you are doing is NOT tac free for at least one of your accounts.
2. DC 529 has a fee for account balances less than $15k (I forget the actual #). There is no economic argument for paying a fee if you can avoid it by leaving small amounts in your DC account

Please don't take financial advice from DCUM!!!

Fair point, I wouldn't take financial advice from you:

1. I know the 12 month rollover limitation. Because of that our rollover date creeps forward a bit each year. We started in January years ago and do it in March now. Every year it goes forward about 10 days- I send the form in the day after Vanguard says it received the funds the year before. I also properly report it all on my DC and federal taxes properly. And yes we have separate plans for each kid.

2. If you actually check the DC plan webpage, the fee is $10/account/year for DC residents, no matter the amount in the account.

https://www.dccollegesavings.com/home/faqs.htm

"What are the fees associated with the DC College Savings Plan?
The DC College Savings Plan has no commissions, loads, or sales charges. The total annual asset-based fee varies from 0.15% to 0.80%, depending on the Portfolio you choose. Each account is also subject to an Annual Maintenance Fee of $10 for DC Residents and $15 for non-DC residents."

Sorry, that was a bad link to the DC 529 FAQ.

https://www.dccollegesavings.com/home/faqs.html