Grandpa set up 529 plan for grandchild. In 2012 he incorrectly filled in paper work which directed the 529 plan to direct pay $150,000 to the college ($14,000 is the income portion. The year's college costs were $50,000. The college has retained the $100,000 in the kid's account. If we treat the 100k as not used for college costs there is no tax becasue the AOC offsets the income but there is a $900 penalty. Is there an arguement that since the college kept the money, that is a form of prepaid tuition and room and board and therefore not yet subject to treatment as withdrawn for non qualified purposes?
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I would think so.
Since the money went to the college, and the college hasn't regurgitated it. The other possibility might be to have the college return it to the account, and then treat it as some kind of administrative error.Evan Appelman, EA -
Future expenses might present a problem
While I understand what occurred (bad move by grandpa) I think you need to do a bit of research into how to treat the large (for all intents and purposes "excessive") distribution.
In so many words, you would be essentially creating qualifying/offsetting college expenses where none yet exist. (In theory perhaps yes, in reality no.)
What happens if the kid exits college, or transfers elsewhere??
And along a similar line, going this route might make for some very interesting future AOC scenarios..... Can't wait to see those Forms 1098-T !!
IF you can negotiate the fact that the college essentially now has a funded "bank account" for the student, and then will draw down on those funds when legitimate expenses arise, you should be OK. But, quite frankly, I am unsure that is an allowable option to cover the very large 2012 withdrawal.
Perhaps others here have encountered a similar scenario. Closest I got to same was a person who made a 529 withdrawal, and then after the fact the student received a very large scholarship. IIRC, when all the dust had settled there was some taxable income shown on Form 1040.
Keep us posted!
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