Author Topic: PhD student w/529 - is mortgage qualified?  (Read 330 times)

tdbat

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PhD student w/529 - is mortgage qualified?
« on: September 18, 2017, 12:53:11 PM »
I have what I believe to be an unusual situation. I am in graduate school in Indiana, a state that offers a 20% tax incentive on contributions to a 529 (max $5000 contribution/year). I am in Biology where most of the tuition and cost is waived in lieu of me teaching or bringing in grant money to cover the costs. Thus, the only other qualified expenses I've had are books, fees, internet, etc. I did not have the 529 account before starting my degree but just opened it as a way to pass money through to pay the costs I'm incurring and get the state tax incentive. I have two young children so I figured if I end up with leftover money in the account, I can change the beneficiary to one of them.

Well I only contribute about $1500 a year; I make very little with my stipend so I only put in what I need to cover the qualified costs.

One qualified cost that I hadn't considered is room and board. I have a mortgage off-campus and off-campus housing is qualified, as long as you don't exceed the amount that the school would charge you if you were on campus. In my case, the mortgage is half as much as it would cost to live in the University Apartments with a family. However, if I could move money to my 529 and reimburse my mortgage costs for the year, I would hit the $5000 contribution limit and maximize the state tax incentive. I couldn't find much information online about this type of situation other than parents (account owners) buying houses and charging their kids (beneficiaries) rent to live there, making the expense qualified because the beneficiary incurs the cost. In my case, I am the account owner and the beneficiary. What makes this unusual is that most PhD students aren't buying houses but given the low cost of living here and the 5-6 year term of my degree, it made much more sense than renting or living on campus. Plus, I had already built equity in a prior house that I had to use as a down payment.

Does anyone see any flaws in this proposition?


MMbergmann

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Re: PhD student w/529 - is mortgage qualified?
« Reply #1 on: September 18, 2017, 03:44:02 PM »
I would say no but have not researched it. If you would lose out on a home mortgage interest deduction, then that would be a potential draw back, but it doesn't sound like that is the case, unless your wife works and you didn't mention it

seattlecyclone

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Re: PhD student w/529 - is mortgage qualified?
« Reply #2 on: September 18, 2017, 04:59:54 PM »
This sounds legitimate to me. As long as you can show that you actually spent that money on food and housing costs while at least a half-time student, that expenditure can be used to substantiate a 529 withdrawal.
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secondcor521

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Re: PhD student w/529 - is mortgage qualified?
« Reply #3 on: September 18, 2017, 05:52:23 PM »
I believe it is qualified to the extent that the withdrawals from your 529 to pay your mortgage (and your grocery bill; the same logic applies) is less than or equal to the related amounts that your school figures in for your COA (cost of attendance) figures.

So go to your school's financial aid office and ask them for an itemized COA for the current school year.  Whatever it says on there for room and board is what you can withdraw from the 529 and pay towards your mortgage and grocery bill.

And yes, "rinsing" the money this way does enable you to a 529 state income tax deduction as you are hoping it will.  And yes, it is OK for you to be both the account owner and the account beneficiary.  I did exactly the same thing when I was getting my MBA.  I ended up with some left over somehow and just transferred that 529 to one of my kids.

I think there may be a requirement that you are attending school full time in order for room and board to qualify.  But you can google that pretty easily.

The two other obvious things to do is make sure that the timing of the withdrawals lines up with when you incur the expenses, and of course keep a decent paper trail.  You'll get a Form 1099-Q I think it is from your 529 showing your withdrawals, and you'll need to be able to justify that withdrawal correctly to the IRS *if they ask*.  Otherwise as far as I can tell it's an honor system - you get the 1099-Q and if the withdrawals are all qualified you don't do anything with it on your taxes - just file it away with your records in case of an audit.
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tdbat

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Re: PhD student w/529 - is mortgage qualified?
« Reply #4 on: September 20, 2017, 08:07:47 PM »
Thanks for the replies. I hadn't thought about the potential conflict with mortgage interest deduction. I wonder how that all works; part of our monthly payment goes to escrow as well, which is insurance and not a qualified expense. However, it is a cost I incur to live here and go to school here. If I were paying to live on campus or rent off-campus, the costs of property insurance and mortgage interest would be reflected in my rent.

Maybe to be safe, I should only use 529 funds for mortgage principal?