Changing a non-qualified distribution to a qualified one

prinehart 2020-06-04 00:38:21 UTC #1

I withdrew $3000 from my son's 529 in January as a non-qualified distribution, expecting that his summer tuition would be covered by scholarship. I now find his scholarships do not cover his summer tuition. (He is on co-op rotation and is required to take summer classes between work rotations). He will also have living expenses that are determined by the University's COA. Total qualified expenses this summer are $6375. Can I treat the non-qualified distribution as a qualified expense? I plan on only withdrawing $3375. What documentation do I need?

When I have made a non-qualified distribution before, the 1099Q shows earnings in box 2. When it is designated as a qualified expense, box 2 is left blank.

Thank you

dcandmc 2020-06-04 12:57:34 UTC #2

That's not the way it's supposed to work. Box 2 of the 1099-Q should always show the earnings portion of the distribution, whether the funds are used for qualified or non-qualified purposes. The 529 plan administrator doesn't make the decision or keep official (for IRS purposes) records as to how distributions should be characterized -- that is the repsonsibility of the account owner.

prinehart 2020-06-04 19:30:23 UTC #3

Are Coverdell distributions supposed to show the box 2 earnings amount? I've never seen an earnings amount on my 1099Q- Coverdell distributions. I've only made one 529 withdrawl prior to this (2018) and it was non-qualified and showed an amount in box 2. All my Coverdell distribution 1099Q's leave box 2 empty - two banks, two kids - three years - zero amounts in box 2. - So that is why I asked, as it has been my experience.

dcandmc 2020-06-04 20:07:16 UTC #4

I'm much more familiar with 529 plans, but my understanding from reading IRS Pub 970 is that starting in 2019, a Coverdell payer or trustee had the option as to how to complete the 1099-Q regarding the reporting of earnings and basis for distributions made during the tax year.

See page 52 of IRS Pub 970, beginning with the "Earnings and basis" paragraph.

https://www.irs.gov/pub/irs-pdf/p970.pdf