Incorrect 1099-Q for 529 plan

Submitted by Max Wilson on Thu, 2023-10-12 19:37

I have a client who called us last year to make a distribution from their child’s 529 plan in the amount of $50k. We sold $50k in the 529 plan but the client called back, prior to us sending the funds to the client, and let us know it only needed to be $20k. So, the distribution from the 529 plan sent to the client’s bank account ended up being only $20k and we repurchased $30k in the 529 plan.

At the end of the year, form 1099-Q was created showing a $50k distribution even though only $20k was distributed. The broker-dealer and clearing firm have both said this is correct and that all sell order amounts in 529 plans get reported on form 1099-Q. I have not found anywhere on the IRS website that shows this and everything I have found shows that you can do two trades each year in a 529 plan. Anyone else delt with this previously?



Submitted by Alan - IRA critic on Thu, 2023-10-12 21:04

The 30k should have been processed as a rollover contribution by the custodian. The client will report this on Form 8889, Part II which includes reporting the rollover and determining how much of the 20k not rolled over will be taxable.

Submitted by David Mertz on Thu, 2023-10-12 21:41

  • Form 8889 is for HSAs, not for QTPs.  There is no form on which to report a rollover of 529-plan distribution.  The amount rolled over is simply omitted from the tax return, but to avoid questions from the IRS you should probably include an explanation statement with your tax return indicating the amount of the rollover.
  • Note that section 529(c)(3)(C)(i)(I) allows a rollover to *another* 529 plan, so it’s not clear that a rollover back to the original plan is actually permitted.  I’ve been unable to find anything definitive on this.

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