Texas A&M estimates room and board to be $10,368/year. My understanding is that this amount could be withdrawn from a 529 plan without penalty, unless the actual expenses were less. However, if I just buy a $100,000 home with cash, could I take a $10,368/year/child withdrawal from the 529 plan and pay myself back over several years?

I think it can be done but with some tweaking. If you use the 529 plan funds to pay a mortgage on a property you (the parent) owns, then your child is not incurring the expenses. You could charge the child rent and be ok. But then you have a rent property to contend with come tax time. And, as you appear to already know, you have an annual limit as to how much can be used for room and board.

You may need receipts as well. I would bet that anything below the 10k that A&M provided would be fine without receipts.

Seems like there was another thread recently where someone talked about doing this. They bought a house, then charged their kid rent with the rent money being taken from the 529.

Can't remember if there was anything else "special" that he did on it.

94chem said:

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Texas A&M estimates room and board to be $10,368/year. My understanding is that this amount could be withdrawn from a 529 plan without penalty, unless the actual expenses were less. However, if I just buy a $100,000 home with cash, could I take a $10,368/year/child withdrawal from the 529 plan and pay myself back over several years?

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I'm no tax expert, but I don't think it matters if your actual expenses are less than what A&M estimates.

Case in point... I had 3 kids at A&M recently and the IRS sent me a letter claiming I owed taxes on the earnings associated with withdrawals from their 529 accounts. I was the owner of the accounts, and they were the beneficiaries. I wrote them back and showed that the tuition for each kid (from the form they got from A&M) plus the estimated room and board published by A&M exceeded the earnings associated with the withdrawal for each child, and therefore I didn't owe any taxes. They wrote me back and agreed, and the case was closed.

Important point... you don't owe taxes on the original contribution since those funds were already taxed. It's just the earnings that are potentially taxable.

In the kids' case, I paid tuition, rent and utilities for apartments, plus groceries. And I reimbursed myself from the 529's. But I don't think it would have mattered if I instead paid tuition, a mortgage note on a house in CS, and groceries. The IRS didn't ask for detailed expenses on room and board costs. They accepted A&M's estimate as valid. I kept detailed records just in case, but it would have been a royal PITA to dig all that stuff up and calculate it precisely.

Fwiw, my actual expenses (and A&M's estimate) far exceeded the earnings associated with each withdrawal, so it would have been a moot point either way.

Curious what a tax expert would say.

As a point of reference:

When I was going to grad school in 2005-2009 (continued to live till 2011), my rent for a Boyett street apartment was $475-$450 (475 first year, 450 the remaining years). I had everything gas, barring the AC. No cable, best DSL internet, split 4 ways (next door neighbor (2) and me/roomie) and paying water/trash/sewer in CS.

At the end of the day, total cost was about $700 a month to live; this was split with roomie ($350 per person). No food, but that was an additional $400-$600. This is cooking 90% of the time at home.

I had originally budgeted $10k/year to live the poor grad student life, off my savings. I came pretty close to that with minimal going out and random trips. The other $10k was borrowed and paid tuition.

YMMV, but a real data point on CS costs of recent memory.

~egon

MemphisAg1 said:

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94chem said:

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Texas A&M estimates room and board to be $10,368/year. My understanding is that this amount could be withdrawn from a 529 plan without penalty, unless the actual expenses were less. However, if I just buy a $100,000 home with cash, could I take a $10,368/year/child withdrawal from the 529 plan and pay myself back over several years?

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I'm no tax expert, but I don't think it matters if your actual expenses are less than what A&M estimates.

Case in point... I had 3 kids at A&M recently and the IRS sent me a letter claiming I owed taxes on the earnings associated with withdrawals from their 529 accounts. I was the owner of the accounts, and they were the beneficiaries. I wrote them back and showed that the tuition for each kid (from the form they got from A&M) plus the estimated room and board published by A&M exceeded the earnings associated with the withdrawal for each child, and therefore I didn't owe any taxes. They wrote me back and agreed, and the case was closed.

Important point... you don't owe taxes on the original contribution since those funds were already taxed. It's just the earnings that are potentially taxable.

In the kids' case, I paid tuition, rent and utilities for apartments, plus groceries. And I reimbursed myself from the 529's. But I don't think it would have mattered if I instead paid tuition, a mortgage note on a house in CS, and groceries. The IRS didn't ask for detailed expenses on room and board costs. They accepted A&M's estimate as valid. I kept detailed records just in case, but it would have been a royal PITA to dig all that stuff up and calculate it precisely.

Fwiw, my actual expenses (and A&M's estimate) far exceeded the earnings associated with each withdrawal, so it would have been a moot point either way.

Curious what a tax expert would say.

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The whole reporting of 529 plan distributions is a mess. And actually it isn't that your qualified expenses exceed the earnings that counts, it is that the qualified expenses have to exceed the distributions; if not, then some portion of the earnings will be taxable. Compounding the situation is you cannot use the qualified expenses for two purposes. Any amounts used for the available tax credits cannot be used again in the calculation for reducing (or eliminating) the tax on withdrawals from the qualified tuition program. There are other issues as well.

All of these calculations are behind the scenes, they show up nowhere on the return other than if you determine part of the withdrawal is taxable. They should have form as part of the return that takes all of this into account but, for now, unless they question it, it is more or less on the honor system. I have only had a couple of taxpayers questioned about this.

El Chupacabra said:

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$10k a year room and board? I better start saving more.

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lol yes! I have three children and for one year I had three in college, then for 4 years I had two in college. I had done a decent job of saving for all that but not decent enough. While tuition and books (yikes) was bad enough, it was the maintenance of all the households (or the cost of same). During all that we had our own home, two offices during part of the time, one during part of it, and two for the two who went away for college. Seemed like one, or more, always needed $600 for this or $800 for that. Their vehicles were paid for which helped. But yes, saving more might be a good idea.

Then, if you have daughters, there is that wedding thing......