529 advice

<p>Hello. I have been lurking for quite a while and have learned a lot from the posters here. Now I come out of my mousehole with some questions of my own.
My daughter is attending a state college, this is her first year. Her grandfather has a 529 account for her, but he says it's losing value now. It's in a "moderately conservative" account, and he tells me that it's a mix of treasury bills, bonds, and stocks. I don't know much about the stock market or investments, but he says it's not losing as much as some more aggressive accounts, but still is losing value.
My daughter got a little federal and state grant money based my income, too. Her grandfather is concerned about how to manage her withdrawals from the 529 so that it will go as far as possible. That probably won't be until she graduates, but the farther the better of course. He thinks she should spend down the 529 money and just save the grant money since it's a fixed amount and the 529 account is losing value, which he thinks it probably will for the next few years.
I have two questions: First, can she withdraw the whole amount of her tuition if she's also received some grant money for that purpose? Like if she gets $2000 in grants, is she limited to only withdrawing her college expenses minus the $2000, or can she withdraw the whole amount from the 529 account and save the $2000 for later? Second, do you think he's right about spending down the 529 account earlier instead of stretching it out and hoping it doesn't keep losing value?<br>
Also, she hasn't borrowed any money yet, but would there be some benefit in subsidized loans as part of the picture for the next few years? She wants to finish school with little or no debt, but I'm not sure that's possible. But if she borrowed some money that is interest-free while she's in school and used the grant money she could hold onto to pay it back when she's finished with school, does that make any sense? Or if she took out a loan and used it to pay for school, and her grandfather withdrew the money from the 529, could he keep it and give it back to her when she graduates to pay off the loans? Someone told me that was a good way to do it.
Thank you for any advice. Sorry for the long post.</p>

<p>
[quote]
Second, do you think he's right about spending down the 529 account earlier instead of stretching it out and hoping it doesn't keep losing value?

[/quote]

No one can predict this but if you think the market has had a recent, steep, historical drop, then perhaps it would be better to wait longer to allow the market to bottom out and reverse itself. The 'buy high, sell low' method doesn't work out well. </p>

<p>Some wiki info on the 529 -
529</a> plan - Wikipedia, the free encyclopedia</p>

<p>It is difficult to answer your question based on the information given. The IRS publication for education tax benefits, including 529 accounts, is IRS 970.
<a href="http://www.irs.gov/pub/irs-pdf/p970.pdf%5B/url%5D"&gt;http://www.irs.gov/pub/irs-pdf/p970.pdf&lt;/a>
page 49 - Qualified tuition programs - gives you the information about what a qualified education expense is for 529 account distributions.

[quote]
Qualified education expenses. These expenses are the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution (defined in the next column). They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. The cost of room and board qualifies only to the extent that it is not more than the greater of the
following two amounts.
1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

[/quote]
</p>

<p>Unless the grants your daughter has completely cover the cost of tuition and fees, books, and room and board you will still have plenty of expenses to use the 529 funds for. You really have to look at all her expenses and see the best way for you to use the funds and take advantage of other tax benefits. There is no double dipping for tax credits so for instance you cannot use the same education expense to make a grant tax free and use it for the Hope tax credit or for the 529 account withdrawal. Take some time to look through the whole 970 publication to familiarize yourself with the various education tax benefits and their rules.</p>

<p>If money is withdrawn from a 529 account and is not used to pay qualified education expenses in the year it is withdrawn then taxes and a 10% tax penalty will be owed on the part of the withdrawal that is earnings. Paying off a loan is not considered an edication expense. So her grandfather would need to be cautious about withdrawing funds if they are not being used to pay education expenses.</p>

<p>Thank you ucsd<em>ucla</em>dad and swimcatsmom. I downloaded the IRS publication, swimcatsmom. I guess that's going to be my reading for the next couple days. LOL. Thank you also for the insight on "double dipping", not that I was planning on anything like that, but in a funny way it helps to clarify how I should think about this.</p>

<p>It is a good thing to keep in mind. For instance if you are eligible for the hope tax credit then you may be better off passing up one tax credit in order to get that. My son was able to get the Hope tax credit last year so got all his tax he had paid refunded (he had been out of school and working full time). We had to make sure we did not take too much money out of his 529 account that year or he would not have got the tax credit. I actually have a spread sheet trying to figure out how to maximise the tax benefits. Makes my head spin a bit sometimes.</p>

<p>One fun (and I use that word very sarcastically) thing to watch out for is that the different tax benefits have different 'qualified education expense' definitions. For instance room and board is a qualified expense for 529 acccount withdrawals but not for Hope tax credits.</p>