3 Money Smart Ways to Reinvest Your COVID-19 College Tuition Refund
Written by Nicholas Ibello, CFP®, AIF®
Published on Paladin Registry on May 28, 2020
Has your college canceled its in-person and online classes due to the COVID-19 pandemic? Unfortunately, this has become the norm this spring. Social isolation has rendered continuing education for the 2019-2020 school year impassable. A plethora of students are unable to complete their courses prompting many colleges to offer refunds for tuition and fees. But what is the best way to repurpose your college refund for the future?
Recontribute the Funds Back into the 529
If your refund is from funds originally withdrawn from a 529 plan, your only tax-free, penalty-free option may be to recontribute those funds back into the original 529. Of course, this is the preferable option for students who plan to continue their education after schools reopen.
Because 529 plans are state-sponsored programs, the administrative process for recontributing refunds into the original 529 will vary from state to state. In Maryland, residents who took a qualified distribution from their Maryland College Investment Plan account to pay for tuition, room and board, books, or other qualified expenses are permitted to reinvest their refund.
Normally, refunds would only be allowed to be reinvested within 60 days of the refund date, but the IRS has extended that deadline. This year, if the 60-day deadline falls between April 1, 2020 and July 15, 2020, qualified recontributions to 529 plans for the 2020 school year can be made at any time before the later of July 15, 2020, or 60 days after the refund date, without incurring federal taxes or penalties.
Keep in mind, if a refund is not recontributed by the deadline, it may be considered a non-qualified withdrawal and any earnings that were withdrawn could be subject to income tax and the 10% distribution tax.
Build Up Your Emergency Fund
In this weakened economy, many people are struggling to make ends meet. As a result of decelerated commercial activity, business shutdowns, and ascending unemployment, many individuals are having to postpone their planned retirement dates and dip into their savings in order to satisfy their monthly expenses.
If this has been the case for you, and the refund you received was from funds not originally paid from a 529 plan, consider using your refund to replenish your emergency fund. The general rule of thumb dictates that you should consider having a minimum of 3-6 months of non-discretionary living expenses available in a safe, liquid, high-interest savings account. It is important to make sure that these expenses cover important necessities like housing, food, transportation, and insurance (health and auto) premiums. This account will be there to fall back on should a sudden emergency arise or you suffer a temporary loss of income.
Contribute to a Roth IRA
Having a liquid emergency fund is important for unforeseen expenses that occur in the near-term, but any excess funds beyond the emergency fund are usually best served being invested. Investing gives your money the opportunity to outpace inflation and build wealth for the future. As such, if the refund you received was from funds not originally paid from a 529 plan you may find a Roth IRA a valuable way to reinvest your refund. Roth IRAs have special advantages over 401(k)s, traditional IRAs, and traditional brokerage accounts.
- Access to your basis: The basis refers to the contributions you have made, and you can always access these funds at any time without penalties or taxes. This perk makes the Roth IRA more flexible than IRAs and can also allow it to serve as a pseudo-emergency fund. While it’s prudent to keep this money invested, you can feel more secure knowing that it’s available in case of an emergency.
- Potential access to tax-free earnings: Contributions are made with after-tax money and withdrawals are tax-free once you’ve had the account open for at least 5 years and are age 59 ½. You can also make a one-time penalty-free distribution of $10,000 towards a first-time home purchase.
These times are undoubtfully stressful. Many students are disheartened to have had to cut their school year short and others are having difficulty finding work as unemployment numbers swell to Great Depression levels.
While preparing for the days ahead, repurpose your refund in the manner that best suits your future plans. If you plan to return to school, recontributing to your 529 (or opening a new 529 with the same beneficiary) may be the most prudent option. For those who wish to explore alternative avenues, funding a Roth IRA after building up an emergency fund may be most beneficial.
If you need more assistance deciding how to repurpose your refund, we encourage you to reach out to the advisors at Williams Asset Management. We specialize in helping individuals and families make prudent financial decisions that work to protect their wealth, enhance their future, and better position them for long-term financial success.
Let the CERTIFIED FINANCIAL PLANNER™ professionals at Williams Asset Management help with your wealth management needs. Whether you need comprehensive and holistic financial planning or investment management, we can help! We are fee-based, independent financial advisors located in Columbia, the heart of Howard County, Maryland. Schedule your complimentary consultation today by calling 4107400220!
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