Can I withdraw the funds from the account and reimburse my son who has paid the tuition, room and board and other qualified expenses?
The reason for this question is the parents want to pay the expenses since they feel it is a parental obligation to educate their children.
Many people assume that you must be able to trace the money withdrawn from your 529 plan to the actual payment of college costs. However, nothing in the law or in IRS pronouncements says you do. For a 529 plan withdrawal to be tax-free, you simply have to be able to show that the account beneficiary, in this case your granddaughter, incurred a sufficient amount of qualified higher education expenses in the same year.
This means you should be fine doing what you propose to do. The fact that you are using the 529 money to reimburse the parent is irrelevant.
The IRS has proposed some anti-abuse rules to prevent taxpayers from taking unfair advantage of the flexibility provided under the tax law. I do not see anything abusive about your plan. However, what you need to do is make sure that no one else, such as the parent, is using 529 plans to pay those same college costs. Otherwise, there could be a conflict and you would have a problem claiming those costs for your own particular 529 withdrawals.
Another issue you face concerns gift taxes. When you request a distribution from the 529 plan to yourself, the money comes back into your pocket. Your tax professional may advise that the payment to your son become a gift from you to him, and if the amount of reimbursement exceeds the gift tax annual exclusion amount (currently $13,000), you will need to file a gift tax return.
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