Reply to If your kid doesn't spend their 529, what will you do with that money?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]I gave it to my kid and told them to save it for grad school but if they didn’t go to grad school they could use it for a downpayment or something (didn’t want to leave it in the 529 in case they didn’t go to grad school). [/quote]

So you paid the withdrawal tax on it? Or, did you cheat on your taxes? Curious.[/quote]

For reasons not worth explaining we ended up paying out of other funds so we neither paid the tax nor cheated on our taxes as there is no requirement that the exact dollars used for tuition be traceable to the 529.

Basically we felt that we didn’t need those funds for retirement or other siblings but also we weren’t sure we’d be able to contribute more to grad school so we decided it was better to give the funds now with the understanding that it was all they could expect to get to fund grad school.

[/quote]

What this person did is literally fraud. You can’t just take the money back out of a 529 and give it to the kid. Legally the money you have saved tax-free in a 529 account must go toward educational expenses. Otherwise you must pay a significant tax penalty. If this were allowed then lots of people would be using 529s as a way to get around paying taxes on capital gains.[/quote]

If you have $25k in qualified educational expenses and you get a check for $25k from the 529 the IRS isn’t going to check if there were other deposits and withdrawals to your checking account between when you got the 529 check and paid the tuition bill.

Everyone (well apparently except you) understands that money is fungible and the limit on abusing 529s is having qualified educational expenses— not proving that the exact same dollar bills are traceable from the 529 to the college. [/quote]

While I agree with you on this, it doesn't answer the question.  The question is, if your kid's total qualified education expenses end up being significantly less than what's in their 529.  If you had qualifying educational expenses that you used the 529 to pay for, even if you initially paid them another way, and then reimbursed yourself with the 529, that's a different thing.

I have told my kids that they need to work to provide their own spending money.  If it looks like we won't use the 529 money, we can withdraw a reasonable amount for spending money, and give it to the kid.  That would be legal, but it would only be a small portion of the 529.[/quote]

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