Level 3

529 Withdrawal Calculation and Student Loans

Forum|Forum|4 years ago
December 28, 2021
1 reply
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Assume dependent student has $30k in tuition and related fees and room and board for the year. Assume the entire $30k would qualify for a nontaxable withdrawal from a 529 account. If the student borrows $5k in student loans and the parents pay the remaining $25k from their bank account, how much can parents withdraw from 529 account for the year to reimburse themselves? It would seem that the entire $30k can be withdrawn from the 529 account tax-free BUT the loan would not qualify for the student loan interest deduction and the remaining 529 funds could not be used (later in time) to repay the $5k loan. In essence, it seems that the "student loan" isn't a student loan anymore but just a regular loan. See, for example, IRC section 221(d)(2). Thoughts?

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qbteachmt

Level 15

"In essence, it seems that the "student loan" isn't a student loan anymore but just a regular loan."

You withdraw funds meant for school, but didn't pay off the loan, so unless the costs of the loan (and school) are more than that withdrawal, of course you cannot write off the interest, and you can't take out more 529 money later to repay the loan, because:

You already took that amount for that supposed reason out of that account; and,

You already got "repaid" for the loan, by your initial withdrawal, so you don't also get to write off the interest as a double benefit.

What you have, in essence, as the Net, is: borrowed as school loans, then used that as an excuse to remove 529 funds falling under the tax-free umbrella, but then you didn't follow through. You don't get two shots at the same benefit.

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T

TC12Author

Level 3

I didn't ever intend to repay the $5k loan with the $30k withdrawal. I withdrew the $30k because I had education expenses of $30k. On my facts, I believe I could still withdraw $10k on some future date to pay off student loans BUT I just could never withdraw any money from my 529 plan to pay off the $5k loan because it isn't a "qualified education loan" under section 221(d)(1) and section 529(c)(9). The real point of the question, however, was whether section 529 would require me to reduce the original distribution to $25k or whether I could withdraw the entire $30k tax-free. I believe I can withdraw $30k tax free and I don't see anything in section 529 that would say otherwise.

qbteachmt

Level 15

"I didn't ever intend to repay the $5k loan with the $30k withdrawal."

Exactly; yet, that's the only reason you are entitled to Tax Free withdrawal from a 529 plan account = for school expenses. So, if you didn't pay them with the 529 funds, you paid them with the loan that you used to justify the withdrawal of the 529 funds. Then, you didn't use them like that. That doesn't absolve you of the facts, and that doesn't open the door to a Second benefit of writing off school loan interest in addition to having made that withdrawal tax free.

"I withdrew the $30k because I had education expenses of $30k."

I? Are you not a tax preparer asking about your Client's scenario?

You stated this: "Assume the entire $30k would qualify for a nontaxable withdrawal from a 529 account."

It isn't clear what you are trying to accomplish. You can't get Double Benefit from anything here.

You seem to be lost on the internet.

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