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Can I deposit money into a Colorado 529 and withdraw for expenses in the same year?

Personal Finance & Money Asked by Android Newbie on November 29, 2020

I’m getting smart to 529 plans way too late, but also wasn’t sure if the kid would go to college and I happen to have come into a bit of money.
I paid $5K for tuition in September 2020 for the fall Semester.
Tuition will be another $5K in February(?) 2021 for Spring Term

Can I open a Colorado 529 plan today, put $10K in it, with a short-term investment portfolio (I could even go 100% Money Market) and:

  • get the CO tax deduction on 2020 taxes from contributing to a 529 in 2020 (I think yes)
  • withdraw $5K in February 2021 to pay the Spring tuition (definitely yes)
  • withdraw $5K in December 2020 to cover the September 2020 tuition even though it was incurred before opening the plan? that’s the one I’m not sure. Maybe the IRS only worries about what year expense and distribution occur regardless of when the plan and contribution was made?

If yes, then I get an additional tax break on $5K

One Answer

get the CO tax deduction on 2020 taxes from contributing to a 529 in 2020 (I think yes)

Yes, this is correct.

withdraw $5K in February 2021 to pay the Spring tuition (definitely yes)

Yes, this is correct.

withdraw $5K in December 2020 to cover the September 2020 tuition even though it was incurred before opening the plan? that's the one I'm not sure. Maybe the IRS only worries about what year expense and distribution occur regardless of when the plan and contribution was made?

Yes, you can pay for the expenses related to an "academic period" in the current tax year and the first 3 months of the next year. September 2020 is in the 2020 tax year so not a problem.

IRS (source):

You must pay the qualified education expenses for an academic period that starts during the tax year or the first three months of the next tax year. Academic periods can be semesters, trimesters, quarters or any other period of study such as a summer school session. Academic periods are determined by the school. For schools that use clock or credit hours and do not have academic terms, the payment period may be treated as an academic period.

Answered by Alex B on November 29, 2020

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