Can the beneficiary take a large deduction and put it in their personal account?

[Chris]

Can a beneficiary take out a large distribution and put it in their own account and then psy for college expenses? What happens if they don’t use the full amount in that year? What is the penalty if there is one. The account holder is being reckless and we are nervous the college fund will be affected. Thank you

[rtaylor434]

My thoughts;

Seems like a risky method that could backfire on the account owner.

The owner, not the beneficiary receives the 1099Q from the 529 plan each year for any distributions and must match that with qualified payments made either to the institution or to cover qualified expenses. Letting the beneficiary receive and then handle the payments themselves does not move the monies from the 529 to cover college costs directly, as intended.

If the paid qualified invoices for 529 expense are not sufficient (and a copy should be received and kept in the owner's files) then the owner risks the tax/penalty for the difference.

Not a recommended procedure.

[dcandmc]

Can a beneficiary take out a large distribution and put it in their own account and then psy for college expenses?

All responses here assume that you are asking about a 529 account. If you are not asking about a 529 account, you need to clearly state what type of account you are asking about.

Unless the beneficiary has control of the account, how is the beneficiary going to do this without the approval and active involvement of the account owner/custodian?

What happens if they don’t use the full amount in that year?

The IRS could assess income tax and a 10% penalty on the earnings portion of any distribution that is not used for qualified expenses in the same year that the distribution is taken. Note that paying the taxes and the penalty would be the responsibility of the student, if the distribution was made payable to the student.

What is the penalty if there is one.

See directly above.

The account holder is being reckless and we are nervous the college fund will be affected.

Is the "account holder" the account owner? If so, the money in the account belongs to that person, and generally the account owner can do whatever he/she wants with the money.

The owner, not the beneficiary receives the 1099Q from the 529 plan each year for any distributions...

If a 529 distribution is made payable to the beneficiary or the school, the 1099-Q will be issued to the beneficiary, under the beneficiary's SSN, and the beneficiary will be responsible for any tax-related consequences of how the funds were used.