Back to School Series: It’s Time to Use your 529 Savings. Now What?

Tax Planning

Your child is off to college for the very first time – how exciting! If you’ve planned properly, you have the funds you need to finance his educational adventure sitting in his 529 plan. Now it is time to withdraw, and I’m sure you have many questions. Here are some answers to the most common questions:

  1. Which 529 account should I withdraw from first? If your child has multiple 529 plans, it doesn’t matter which account you withdraw from first if the funds will all be used for college. But since you can’t predict the future, realize that there may be funds left over that you will want to withdraw. For that reason, it is best to withdraw first from accounts that have the greatest earnings. That’s because the earnings on those funds will go untaxed if they are used for educational expenses. Leave the accounts that have gone up very little for last. That way, if you do withdraw funds that are not used for college at the end, there will be very little in earnings to be taxed on your tax return.
  2. What qualifies as an educational expense? Qualified expenses include tuition, fees, books, room and board, supplies and equipment. But what exactly is included in those categories? Tuition is pretty simple, as are fees and books. If your student is living off campus or at home, room and board cannot exceed the amount the school includes in its attendance costs for federal financial aid purposes. Supplies and equipment can include computers, laptops, tablets and peripheral equipment such as printers. Software is also included, but not software designed for games, sports or hobbies. Internet access is included, but not entertainment and cable costs.
  3. What can I do if I took too much money out of the 529?  If you withdraw more than the qualified educational expenses that you paid on the student’s behalf, you’ll pay tax plus penalties on the portion of the excess withdrawal that is investment earnings. If you find yourself in such a predicament toward the end of the year, can you quick-like-a-bunny put the excess withdrawals back into the plan? No, there aren’t repayment provisions available under the law. But here’s a solution: use the excess you’ve withdrawn to pay for additional qualified expenses before the end of the year. Does Junior need a new laptop or tablet? Ink for the printer? Books for next semester? If you run out of ideas, just ask him. He’ll no doubt have a myriad of things that he’d find useful in completing his studies.
  4. Who is keeping track? Each year, you’ll receive a 1099-Q showing the total distributions that were made from each 529 plan during the previous year. A copy of that form goes to the IRS as well. Be sure to keep the receipts handy in case you have to provide substantiation of the education expenses that you paid.

 

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