If your beneficiary received a refund from a higher education institution, you may be wondering how to use it efficiently. If the funds originated from your College Savings Iowa account, your best move might be to put the refund back into your account.
Account owners can recontribute a 529 account refund of money paid for qualified higher education expenses back into the same 529 account, or another 529 account for the same beneficiary, without incurring any federal income taxes or penalties—as long as you comply with the following restrictions:
- You must recontribute your refund within 60 days of the refund of the payment.
- You cannot recontribute more than the amount of your refund.
- You cannot recontribute a refund that was originally a payment for K–12 expenses.*
For purposes of Iowa’s income tax, the Department of Revenue will not consider a refund of money withdrawn from an Iowa 529 Plan account as a withdrawal or transfer that is required to be added back when calculating Iowa net income if the following criteria are met:
- The refunded amounts must be recontributed to the Iowa educational savings plan trust described in Iowa Code chapter 12D (any amounts refunded, but not recontributed may need to be added back when calculating Iowa net income to the extent previously deducted as a contribution to the Iowa 529 Plan).
- The recontribution must be made to the same account from which the money was originally withdrawn.
- The recontribution must occur within sixty (60) days of the refund.
- The recontribution amount cannot exceed the amount refunded by the educational institution.
An Iowa taxpayer cannot deduct the recontribution amount when determining his or her Iowa net income. The recontribution amount is not taken into account for purposes of determining whether the taxpayer has reached the contribution limit in a given tax year. The Department of Revenue intends to adopt administrative rules that reflect this position in order to clarify the tax treatment of this kind of refund. For more information regarding the Iowa Department of Revenue’s decision on 529 recontributions, visit their website at tax.iowa.gov/COVID-19.
You’ll receive a 1099 for the full (original) distribution amount. Please refer to IRS Publication 970 and speak with your tax advisor about your specific situation to determine any taxable amount.
If you received a refund check from the education institution and cashed the check, or it was directly credited to your financial institution, you can make a contribution of the refunded amount to your existing 529 account. If you received a refund check from the education institution not payable to College Savings Iowa, simply sign or endorse the back of the check as "payable to College Savings Iowa." Then send us the check along with a signed letter of instruction stating that you want the funds deposited back into your College Savings Iowa account as a recontribution of a previous qualified withdrawal. Make a copy of both the check and your letter of instruction for your records.
Michael L. Fitzgerald
Treasurer of the State of Iowa
College Savings Iowa
PO Box 219219
Kansas City, MO 64121
Even if you recontribute the refund, your original withdrawal and 1099-Q tax form will stay the same. Consult a tax advisor to determine any tax liability.
What if …
Your beneficiary is about to graduate and you don't need to recontribute your refund check to your College Savings Iowa account?
It's still a good idea to recontribute. If you decide to keep the refund, the amount will be considered an unqualified withdrawal, and your earnings may be subject to federal income tax, a 10% federal penalty tax, and state income tax recapture. You can always change your account's beneficiary to another family member or use the account for your own education. Or, since 529 plans never expire, you can keep your College Savings Iowa account growing and compounding for a future beneficiary.
Keep in mind …
Students may receive refunds in their student account where parents won't see them, and students may not log in to initiate them. Therefore, if you think you have a refund coming, make sure you:
- Talk to your student. Ask if they've received a refund credited to their student account or if they've received a refund directly.
- Keep track of the timeframe. Remember, you have 60 days to recontribute a refund to your account federally tax-free and avoid negative Iowa tax consequences. If you are not an Iowa taxpayer, check with your state to determine any state tax consequences or consult your tax advisor.
- Retain documentation: It’s important to keep copies of all your refund information on hand for tax purposes, especially if your student receives a check from the school.