Categorize 529 transactions

mattsmith321

Hi everyone,

Trying to figure out the best way to categorize 529 withdrawals to make it a little easier to pull together all the information for tax time.

Specifics:
I have a 529 Investment account that was used to pay education related expenses.
- Monthly tuition payments went straight to the school with two transactions: A Sell transaction and a Write Check transaction which is categorized as Education:Tuition & Expenses (which is tied to a Tax Schedule to help flag it). I don't really have any issues here. It feels fine especially since the money goes out of Quicken at that point.
- Monthly room & board payments made out to my child, also with two transactions: A Sell transaction and then I currently have a Withdraw transaction with the child as the Payee and the category also as Education:Tuition & Expenses. This works fine for flagging it appropriately as an education expense. However, what do I categorize the deposit in Checking? It is not really income so I don't want to flag it as such. I was tempted to link categorize the Withdraw transaction to the Checking account but then there is no way to categorize it as education related.

Thoughts?

Jim_Harman

It sounds like the deposit in Checking is it the other side of the Withdraw for room & Board you described above. Is this going to your checking account, the kid's account, or what?

If it is the kid's account, he or she is taxed separately so that account should be in a separate Quicken file or at least an account marked Separate in your file.

If it is your account, you should record the withdrawal from the 529 as a transfer and then record the actual expenses with the Education category.

mattsmith321

Correct, the accounts are for my daughter and this weekend I created a new file for her. It contains her checking account, a new brokerage account in her name, and then I moved the 529 account from my file to this new file.

And yes, normally as the transaction goes out, that is when it would get categorized as an education expense. As mentioned above, the tuition payments go straight from the 529 to the school. Which is why it makes sense that those are categorized as Education when they leave the 529 account. And seems pretty straight-forward.

The challenge is with the payments made directly to her from the 529. There is guidance that allows off-campus housing and non-campus meals to also be designated as qualified purchases as long as they are within the ranges listed on the school's Cost of Attendance > Room & Board.

Based on what you said above, the most obvious paper trail is 529 > Checking > and then flag / categorize the relevant and qualified outgoing transactions as education expenses. That is essentially what I did for my oldest when I would make a payment and then get reimbursed from the 529. In this case for my daughter, the R&B stipend was pretty low and has squishy qualified education outbound transactions so I may have to rethink.

Dealing with the 529 would have been so much easier had my kids gone the traditional route and burned through the money with payments straight to a school for huge tuition and dorm fees. However, much happier to have her out, money left over, and finalizing a job offer.

Jim_Harman

Others may have different opinions on this topic, but you might want to re-think moving the 529 account to your daughter's file, especially if you are the owner of the account. For example as the owner you can decide later on to direct it to another person (a grandchild or even yourself) and tracking that would be messy if the account is not in your file.

With the account in your file, contributions to the plan are transfers and payments from the account, whether paid to your daughter or directly to the school, are withdrawals from the account with an appropriate category. If you pay the expenses from one of your other accounts and are reimbursed, you would record the payments as education expenses and the reimbursements as transfers.

mattsmith321

This was a fairly clean separation in the case of my daughter. I was the owner of it but it was a transfer of ownership so all of the contributions had occurred years ago on behalf of my parents. And, all of the payments went directly to the school or my daughter.

In addition, I have since liquidated the balance of the 529 into a new brokerage account in my daughter's name so it will be closed soon. We will now get to deal with the taxes and penalty on the earnings. Obviously there were lots of options to transfer the balance to someone else, but in our situation that was what we were looking to do.

Thanks for all the feedback.