Got an unwelcome notice from the IRS asking for taxes plus interest on a 529 plan rollover from 2014. I was thinking that I forgot to document the amount and note that it was not taxable, but there is actually no way to document that in a tax return. Apparently, according to Forbes, if the check box has an x for recipient is not beneficiary, some computer kicks in and thinks it is a non-educational withdrawal. I think they might look at "trustee to trustee" box to find direct rollovers. But this was an indirect rollover. So I had to find the document from the new 529 plan showing the exact amount rolled in, hopefully that is sufficient.
So, other than ragging on the IRS, the lesson learned is to document where your withdrawals went, if you want to use 529 money to pay yourself back. This is the way I prefer to take the withdrawals, so I can decide exactly how much of it use after I've spent the money, can withdraw on a Market high, etc. Also school doesn't know money is coming from 529. This is going to get complicated when I retire and we qualify for education tax credits, and have to account for amounts be covered by 529, education tax credits.
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