College installment plans and 529 withdrawals
What 529 withdrawals are permitted (tax free) when a university's installment plan's payments in one year are greater than the college tuition for the year?
The example: Let's say that yearly tuition is $50,000, split between $25k for the fall semester and $25 for the sprint semester. The university sends out a bill for $25k in June and another in January. Because I can't pay $25k upfront, I enroll in the university's installment plan (administered by a third party for an upfront $70 fee). The installment plan pays $25k in June, and charges me $5k per month for 10 months, starting in June.
So my payments for the year are $5000 for each month of Jun-Dec which totals $30,000. But the university only charged $25,000 for that period and that is what appears on my billing statement. (I payment of $25,000 also appears with a line item of "third party agreement."
How much can I withdraw (tax free) from the 529 plan during that year? $25,000? $30,000? If only $25,000, can I withdraw the remaining $5,000 the following year?
Interesting question, however, the use of 529 plan assets - tax-free - are narrowly defined and financing costs are not one of them. For example, you cannot use 529 plan assets (tax-free) to make payments on student loans. From your question, it appears you have enough in your 529 plan to pay the tuition as it becomes due - why not simply apply the 529 plan funds to the tuition? If there isn't enough to pay all the tuition, use what you do have and see if you can put the balance into the installment plan. And lastly, a $5k fee on a $25k loan is a 20% interest rate - ouch! - it would be much less expensive to use a student loan and then use the money you'd be paying on the tuition installment plan to pay down the student loan. Good luck! | 09.15.14 @ 19:57
Thank you for your reply. (It is a long story why I am using the installment plan rather than paying the tuition when it became due...) Also, the tuition was $50k, not $25k. This isn't a loan, just an installment plan.
While not directly related, see page 96 of http://www.gpo.gov/fdsys/pkg/CFR-2011-title26-vol1/pdf/CFR-2011-title26-vol1-sec1-25A-5.pdf (the 4th page of the PDF), in particular, paragraph In my case, the third party installment payment company is the eligible educational institution’s agent for purposes of collecting payments of qualified tuition, and related expenses. (At least I think so.) So it would seem that my payment to the third party company would be the qualified expense. (And in my example, I could claim $30,000 in qualified expenses in the first year.) | 09.16.14 @ 00:23
I still don't know why anyone would pay an additional $5k just for convenience. Even if it is on $50k , that is still 10%. I've said this to many people over the years: do not make assumptions about your own interpretations of IRS rules. If you really want to try and wriggle through the loophole you think is here, you need to consult with a tax expert. | 09.16.14 @ 00:35