If you or your child will be attending college in the fall and withdrawing assets from a 529 Plan, now is a good time to review the terms, conditions, and procedures of your plan. Most 529 Plans have withdrawal forms available on their websites. Generally, you will have to indicate the type of withdrawal, which investment option you want to take the funds from, and who should receive the funds.
Be aware that college savings plan procedures often differ from plan to plan. You cannot assume that the directions your neighbor followed for her Utah college savings plan will be the same for your Georgia college savings plan.
Let’s look at some of the most common points to consider when withdrawing 529 Plan assets:
What education expenses does the plan consider “qualified”?
- Funds in the account may be used at any eligible higher educational institution in the nation and many abroad.
- In-state or out-of-state private or public college or university;
- For graduate or post-graduate school;
- Community colleges;
- Certain trade or proprietary vocational school, and
- You can search for the Federal School Code on the Free Application for Federal Student Aid website to determine if a school is eligible.
- Funds can be used for:
- Tuition and mandatory fees;
- Books and supplies;
- Equipment required for enrollment or attendance;
- Certain room and board costs;
- Room and board costs often have specific rules that must be met, and
- Certain expenses for “special needs” students.
- Additionally, under section 529 there are no minimum number of credits required to use 529 funds as long as the education is being provided at an eligible educational institution, and
- Room and board generally requires at least half-time attendance towards a degree.
- For Georgia’s Path2College 529 plan, and most 529 Plans, students living at home or off campus will need to use their school’s cost of attendance allowance for room and board as reported to the U.S. Department of Education, and
- For students living in college-owned or operated housing, generally the actual invoice amount may be treated as qualified room and board costs.
When must you notify the plan administrator that you wish to withdraw funds from the plan?
- This will vary from plan to plan, but the general time is about 10 days prior to your need for the money.
- Often, for a fee, funds can be deposited overnight by electronic transfer.
- For Georgia’s Path2College 529 Plan, you may request a direct deposit to your account if
- Your banking information has been on file with your account for at least 30 days, and
- Your address has not changed within the last 30 days.
How do you document that the withdrawal has been used to pay for qualified higher education expenses?
- Each year that withdrawals are made, you or the plan’s beneficiary will receive a Form 1000-Q that shows the total distributions for the year.
- If your total adjusted qualified higher education costs are more than or equal to your withdrawal, nothing needs to be shown on Form 1040, U.S. Individual Income Tax Return.
- If your total adjusted qualified higher education costs are less than the amount distributed, some or all of the earnings reported on Form 1099-Q must be included as income on Form 1040.
- IRS Publication 970 describes the formula for computing the taxes.
- Receipts, invoices and other documents and information should be retained to substantiate the transactions as qualified higher education expenses.
Are college expenses paid directly from the plan to the educational institution, or is the beneficiary reimbursed for expenses?
- Again, this will vary from plan to plan; however, most plans can pay the account holder, the beneficiary, or the eligible educational institution.
Can I take a distribution from both a 529 Plan account and Coverdell Education Savings Account to pay for expenses in the same year?
- You may take distributions from both a 529 Plan and a Coverdell Education Savings Account; however, you must apply the distributions to different eligible expenses in order to obtain the favorable tax treatment. We suggest consulting your tax adviser for help.
Taxes
While withdrawals for qualified higher education expenses are generally tax free, we suggest you work with a tax adviser to coordinate your 529 Plan withdrawal with the American Opportunity credit (Hope credit) and Lifetime Learning credit. While you may use one of these education credits in the same year you withdraw funds from a 529 Plan, this may alter the tax-free nature of your withdrawal, because you have reduced your total qualified higher education expenses. Likewise, if your student is fortunate enough to have received scholarship money, a tax adviser will be able to determine what costs you should apply to the scholarship, the tax credits, and your 529 Plan withdrawals for you to receive the best tax benefit. You will also want to understand how a qualified withdrawal from a 529 Plan will affect your state income taxes. You are entitled only to the state tax benefits (if any) offered by the state in which you reside. Finally, we recommend understanding how a withdrawal from a 529 Plan will affect your child’s eligibility for federal financial aid or aid from the college.
At Henssler Financial we believe you should Live Ready. This includes understanding how to get the most benefit from the money you have invested for your children’s future. Our experts can help you determine the most tax advantageous situation for your college student. If you would like to speak to an expert about using 529 Plan funds, call us at 770-429-9166 or e-mail at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
