I had a CollegeSure CD for my son who started college last
fall. After the CD matured in August, I cashed it out and put the
money in a savings account thinking I had to do that. He didn't have
enough college expenses for the first semester to equal the gross
distribution, so now I think we're in a terrible tax situation. I
guess I was supposed to roll it into a 529 plan? I didn't think to ask
what my options were. We didn't spend most of the money, it's still in
my son's savings account. Am I just going to have to bite the bullet
and pay taxes on all that money?
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If the proceeds from the CollegeSure CD were placed into a savings
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College Savings Bank
(the bank that provides the CollegeSure CD), then the proceeds were
probably not considered a distribution. College Savings Bank provides
a special savings account to hold matured CollegeSure CD funds until
the family is ready to make a qualified distribution. As noted in their
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this is one of the default actions that can occur upon maturity.
If the proceeds were deposited in a savings account (as opposed to a
529 college savings plan or other qualified tuition plan) with another
financial institution, that counts as a distribution. You would have
submitted a Distribution Authorization Form
to do this.
If the proceeds count as a distribution, you should have received IRS
Form 1099-Q Payments From Qualified Education Programs (Under
Sections 529 and 530)
by January 31. The gross distribution shows
up in box 1 and the earnings portion of the distribution in box 2.
If you did not spend all of the money on qualified higher education
expenses within the tax year, then the part that was not spent on
qualified higher education expenses is considered an non-qualified
distribution. The earnings portion of the distribution is distributed
proportionally among the qualified and non-qualified shares of the
The earnings portion of an non-qualified distribution will be subject to
ordinary income tax plus a 10% tax penalty. (The taxes are reported
on the federal income tax return of the beneficiary, not the account
The 10% tax penalty is waived in certain circumstances, such as when
the beneficiary receives a tax-free scholarship, employer educational
assistance or veterans' educational assistance, but only to the extent
of the scholarship or assistance payment. This only affects the 10%
tax penalty; you still pay ordinary income taxes on the earnings
portion of the non-qualified distribution.
If 60 days or less have passed from the date of the distribution, you
can avoid the income tax and the 10% tax penalty by rolling over the
funds into a 529 plan or other qualified tuition plan. In such a
situation the distribution is not considered a taxable distribution.
If you did not have enough qualified higher education expenses because
you used up to $4,000 in tuition, fees and course material expenses to
qualify for the Hope Scholarship Tax Credit (also known as the
American Opportunity Tax Credit), you must choose whether to keep the
tax credit or the tax-free distribution. You can't do both. The same
qualified higher education expenses can be used to justify only one
tax benefit. You can't double dip and use the same expenses to justify
both the tax credit and a tax-free distribution from a 529 college
savings plan. Keep the tax credit because it yields a greater
financial benefit than the tax-free distribution from a 529 plan or
other qualified tuition plan. The tax credit is based on the full
amount spent for qualified higher education expenses, while the
tax-free distribution avoids income tax and the 10% tax penalty on
just the earnings portion of the distribution. The tax credit is also
based on a higher percentage rate than the tax-free distribution.