Since our son was a baby we’ve accumulated a lot in his two 529s. Ones at American Funds, the other at USAA. Son received almost a full ride counting the merit scholarships from the school and some outside scholarships which the school will allow him to stack.
So I’m assuming the school will send us bills where we pay them out of his school account. Any bills above that how do we use the money in either 529? Sorry I’m so naive. There are no check books so do people pay electronically? Do you hang onto all those receipts for tax time? I’m assuming when you file your taxes the amount you’ve used to pay bills gets reported somewhere and do you then have to send in those receipts? Or does the university send you a tax form? I’ve already read where you have to use the form the college sends to count for the merit scholarships.
And lastly you can only use the 529 for bills directly from the college and not other college expenses you might pay to businesses or other entities?
Generally (and it can very by investment company), you contact the investment company through their website or by telephone and ask for a distribution. The distribution can be made directly to the school in the student’s name, made by paper check made out to either the account owner or student and sent through the mail, or made by electronic transfer to a bank account that the investment company has on record.
If it helps with your record keeping, yes, and it might be a good idea anyway in case the IRS later comes asking questions.
No. If all the distributions from the 529 are used for qualified expenses, there is zero tax reporting. And receipts are not “sent in,” unless the IRS requests proof that payment was used for qualified expenses.
You will get a tax form from the school that shows billed or paid tuition and fees, and scholarships or grants received (IRS form 1098T), as well as a form from the 529 investment company that shows gross distributions, broken up between earnings and basis (IRS form 1099Q). These forms are advisory in nature and meant to help you reconcile your finances and file your tax return.
You can use 529 money without tax implications for any 529 qualified expense, and this includes expenses that might not be billed directly by the school, such as text books purchased from a third party vendor or off-campus rent and food costs.
Chapter 8 of IRS Pub 970 has the details.
http://www.irs.gov/pub/irs-pdf/p970.pdf
If your son has a true full ride including books and room and board then there aren’t likely to be much if any in the way of expenses to use for 529 distributions. Read the section about coordinating 529 distributions with other education tax benefits. You can’t use the same expenses for two or more tax benefits, be it tax-free scholarships/grants, the AOTC or tax/penalty free 529 distributions.
Here’s a link with more info that includes the author’s recommendation on how to take any distributions. Distributions have to be taken in the same tax year that the expenses are incurred.
http://www.savingforcollege.com/articles/the-best-way-to-withdraw-529-funds?page=1
Yes, hang on to all bills/account statements, records of payment and receipts.