Hey everyone.
So I’m wondering how one withdrawals money from a 529 account when using it to pay for cost of education. Do you withdraw it to your bank first, or pay the school directly? Do you have to specify and log what you are using the money for so the IRS can track you? How exactly do they know if you are using the money for Qualified Higher Education Expenses?
Thank you!
Hi there. We withdraw the money from the 529 in small amounts as we need it and have it transferred to a joint checking account we’ve set up with our college student son that is solely for that purpose. He also has another checking account for non-529-qualified incidentals (he carries two debit cards – we’ve written “529” in Sharpie pen on one so he doesn’t mix them up). We then pay qualified bills electronically or by check from that special 529 checking account. We prepare a monthly statement and stick it in our tax envelope that simply lists the date, payee, expense, brief description, 529 qualified category for the expense (i.e. Tuition/Fees, Housing, Books, Educational Supplies, or Computer/Internet Access) for each expense each month. We attach all receipts to that statement and staple together. Good to have if you’re ever audited (the IRS does get an annual form from your 529 company showing withdrawals that were made – they could very well reach out and ask you to prove that you used that withdrawal on qualified expenses, so spend accordingly and carefully).
Generally, distributions can be made by check or by electronic transaction to a bank account of either the account owner or the beneficiary, or by payment directly to the school; it’s up to the account owner or custodian.
Do you have to? No. But keeping a record of what you do is a good idea, just in case the IRS comes along asking.
They don’t know unless you get audited; there’s an element of trust at play.
Okay, thank you both. If I am using it for room and board, and I have a meal plan, I probably wouldn’t need to have a card for it (because the school would probably charge everything all at once right?). I think I would just make one big withdrawal each year to cover these plans. I don’t think I could use any more money for food past the meal plan, though. Even if I am truly just eating food. I think I saw somewhere it said you can’t withdraw more for room and board than what the college’s room and board actually is (no shocker there).
It is smart to put withdrawals in a separate account @calgraduclamom.
That’s what I thought, that they would only find out about your use of the money if they audited you. As long as you are using the money correctly, I’m sure there is probably a hidden paper trail that the IRS would access to find you are innocent (in the case that you get audited).
Yes, everything is usually charged all at once, but billing is typically done on a semester basis. So, twice an academic year.
We pay bills out of checking, keep all receipts, and then withdraw from the 529 two or three times per year to cover the permitted expenses each semester. We only withdraw amounts for which we have the receipts.
" They don’t know unless you get audited; there’s an element of trust at play. "
Yes, but I am sure that they know how much university costs to a pretty good degree of accuracy.
@DadTwoGirls Everyone’s situation is different. Merit aid. Financial aid. Grants. Etc
I’m assuming, though, that as long as the withdraws stay under 60k/year suspicion should be low.
Still, good point.
My in-laws set up 529 plans for both our children. Once we have a final cost each semester, the the funds are transferred from the 529 plan directly to the school.
We’ve always made payment directly to the school so that the 1099-Q automatically gets recorded with the students SSN. This is nice because the 1098-T statement with tuition is also in the students SSN. This way, there is never a question that the funds were used for educational purposes.
When we had overages, when D2 lived off campus, the school just issued a refund and we have documentation that the amount was less than her rent in case there should be any inquiry.
No 529 check was ever made out to anyone but a school.
I have the withdrawn funds sent to my bank account. I do not pay the school directly, because all of the expenses are not directly billed by the school and I’m usually doing it after I’ve paid the school anyway. I just keep good records of the expenses and the withdrawals so that I can easily demonstrate that the amounts withdrawn were for qualified expenses.
I have funds sent directly from 529 to school each semester. Either method works. If you have the funds sent to you just keep documentation as to what you are paying with the funds. Both are right answers.
Thanks everyone! I’m satisfied 
Also depending how your school bills, you might have fall semester bill in one year, and spring in another year.
Or both semesters in the same year.
For example, if the school bills are due on Aug 15th and Dec 15th.
I have a question:
I have read that you can use the 529 funds to pay for room and board. However, not everyone lives on campus. If you live off-campus, then you aren’t paying the money to the university, you are paying it to the landlord.
Is there any alternative in this case to just paying the landlord directly (check, credit card, …), keeping the receipts and/or cancelled check, and then withdrawing this much from the 529? Can we ask the 529 folks to send a certain amount of money to the landlord each month?
you can use the 529 funds for living off campus. The total amount may be limited by the actual expenses or the amount the school establishes as the reasonable cost. Just keep good records.
I would be very surprised if a 529 administrator agreed to make payments directly to someone other than A) the 529 account owner, B) the 529 account beneficiary, or C) a qualified educational institution. Just have the distribution made to the account owner or student beneficiary, and then write a check for the housing expenses.
Agreed^
But yeah, I think cost of living and eating off campus cannot be more than maybe the average meal plan/room cost or the highest meal plan/room cost. It probably varies by state.
Related question. My daughter is planning to live off campus next year. She has to sign a 12-month lease. The annual cost (12 times the monthly rent) is less than the school’s charge for housing using their COA. Can the full cost of the 12-month lease be considered a qualified 529 withdrawal? Or just the 10 months she’s in school?
I’m you have to be pursuing a degree on a half-time basis to be able to use 529 money for room and board. So I think you’d only be able to pay for 10 months of the lease.