TaxProfessionals.com
Posted by Pat Raskob

How to Make Withdrawals from Your 529 Plan to Pay Your Child's College Fees

How to Make Withdrawals from Your 529 Plan to Pay Your Child's College Fees

College fees are no joke. That's why it's not too early to start planning for them. Estimation shows that it would cost between $250,000 and half a million dollars to pay for a student through college in the next two decades, factoring in other expenses such as feeding and transportation. With the cost of college set to keep rising, it's never too early to start saving for your children and grandchildren.

You already know that a 529 plan is one of the best ways to save for college. Not only are they tax-advantaged, but they also have additional benefits.

A 529 plan is an effective savings plan used to fund a college education. Earnings from different funds in a 529 grow tax-free, and as long as they are used to offset approved college bills, the withdrawals are also not taxed.

The 529 plan works in two ways. The first is the prepaid tuition plan, which allows tuition for the duration of the schooling to be paid upfront. This plan is not universally available. The second is the college savings plan, on which a savings program, just like the retirement plans, allows you to contribute to a fund that, and you can then invest those funds. You can then withdraw to pay college tuition tax-free.


How to withdraw from your 529

Saving into your 529 is easy. Withdrawing from it may not be that seamless. If you don't withdraw correctly, you may have to pay some penalties. Also, if you don't use the money appropriately, you may be fined.

Remember, you can only use 529 funds for tuition, other school fees, and books. Of course, everything related to educational expenses from computers, appliances, and even student accommodation. Recent legislation also allows up to $10,000 per year of spending on K-12 education, although not all states recognize this.

Transportation and insurance, meanwhile, are not covered by the 529 accounts.

So here are guidelines on how to make appropriate withdrawals.

To withdraw from a 529 plan, you are to fill out the withdrawal request form online or mail it in a form that can be downloaded. You can also request by phone. Once the request is made, you are to supply information that includes your 529 account number, social security number, taxpayer identification number, telephone number, and name.

You can request the total or partial amount, and if there's any leftover, the money could be withdrawn with a 10% penalty or used for further education.

Here are some other guidelines to follow.

  • Follow the rules

529 earnings can only be withdrawn tax-free if used for qualified purposes. The rule changes for each state, so to avoid paying fines, know the costs that are covered.

  • Always pay the college directly.

It is better to transfer the funds to the college directly. It is always more accessible for the 529 administrators to pay the college to avoid any misappropriation.

  • Don't spill payments into another tax year.

Ensure that you pay for every withdrawal done that tax year and avoid spillover into another tax year. Do not include the semester tuition expenses that you paid for in the previous year. 

  • Calculate your qualified expenses

While the account owner can withdraw as much as is desired, only qualified expenses are tax-free. So, to prevent paying extra taxes, you should only withdraw an amount that exactly covers the eligible costs. Remember that eligible costs also vary from state to state, but the most regulated ones are tuition, books, accommodation, and other school fees. Any amount deemed to be above the qualified expenses attracts a 10% penalty.


FOR MORE INFORMATION ON HOW PAT RASKOB CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

Pat Raskob
Contact Member