How to withdraw money from your 529 plan

Parents Forum
1

"Hard to believe, but that time has come: time to send the little one (who is no longer so little) to college. And it’s time to tap into that 529 account.

But how do you withdraw funds from the account without running afoul of the qualified distribution rules? Getting it right is important, because if you get it wrong, you could end up owing taxes on any investment gains in the account, plus a 10% tax penalty." …

http://www.csmonitor.com/Business/Saving-Money/2015/0630/How-to-withdraw-money-from-your-529-plan

2

You give your investment advisor who manages your 529 plan access to your kid’s college payment website and never worry about it again. Money well spent if you have too many other things to do.

3

It’s not rocket science. In my experience, as long as you don’t withdraw more from a 529 than the out-of-pocket balance you owe to a school, you’re ok. Even if your records are sloppy.

But it doesn’t hurt to keep track. For example, I withdraw X recently from a 529 into my checking account followed by a payment of X to the college. The inflow and outflow are on a banking statement.

4

Be sure to withdraw the money from the 529 and pay the expenses in the same calendar year. If you withdraw the money in December and pay tuition in the following January it may create tax problems.

The strange thing is that the IRS does not require detailed accounting on your 1040 of the 529 money. The IRS may come back and require you to submit info to show that the 529 money was used for a qualified expense. In that case, I just printed out all of the payments made to the college, and then listed any other expenses that didn’t show up on that list. The IRS may come back for info a couple years later, so make sure you keep good records.

Also, the statement that the college sends to the IRS typically does not list all of the qualified expenses.

The federal Opportunity Tax Credit can mainly be used for tuition, so you want to distinguish those dollars from other qualified expenses (such as housing).

5

Because the amount we withdraw from the 529 is always less than the amount we pay directly to the college for tuition and room & board, it’s never been a problem. I just electronically transfer funds from the 529 to checking with a notation “D2 Fall 2015 tuition,” then electronically transfer funds from the same checking account to the college. I make sure both transactions occur in the same calendar year and within days of each other. The IRS has never questioned this as the amount of tuition less scholarships the college reports to the IRS annually always exceeds the amount I’ve withdrawn from the 529. I’d want to keep more careful records if we were using the 529 to pay for books, off-campus housing, etc., where the college doesn’t provide that information to the IRS.

6

If you qualify for the AOTC, be sure to pay $4k of tuition with non-tax-advantaged dollars.

7

We have been “audited” twice in the past 10 years because of withdrawals from 529 plans. Once we sent in documentation including the tuition bill, receipts for books, a copy of the apartment lease and meal plan prices from the college website ( I used this amount to justify food expenses) the investigation was closed.

8

Also, if your child is in off campus housing, they will need to send the following to the Bursar (typically only they can send it, not you), to make sure you are only being reimbursed the proper amount for that. I used this wording that was provided and DS sends each semester (or summer) to the Bursar and they sent the breakdown to him.:

“Hello. I would like to obtain information concerning qualified 529 education expenses. What is the allowance for Room and Board (Spring 2015, Summer 2015 and Fall 2015) that is included in the cost of attendance (for federal financial aid purposes).”

He also includes his student ID. Although we don’t do Financial Aid, this is the wording that needs to be used for find out what we can withdraw for his apartment. His apartment costs more than on-campus housing. Unlike a bill or invoice you receive from the university to provide the IRS as documentiona when they are living on-campus, you have to find out exactly what you are able to pull out for off-campus housing.

9

New here on CC and looking for withdrawal strategy for 529 plans. I have twins who will be entering college at same time. We have a decent amount in 529, but not nearly enough to cover college costs for 2 kids for all 4 to 5 years of school. Is it best to ‘stretch’ the amount in the 529 plan and spend a little bit every year they are in school, or is it best to front-load the spending, possibly spending all 529 plan money in the first two years of school? I am thinking of tax implications or possible financial aid implications down the road in their latter years of college.

10

@MsSunshine15 If you do not have enough money, it is best to stretch out the student loans over all four years - you are only eligible for so much from the federal direct loan program each year. Not taking your eligible loan freshman year will not increase the amount you are eligible for sophomore year. So plan out the total amount of loans your kids will need and make sure you take enough each year. (Note: I’m talking about Federal direct subsidized and federal direct unsubsidized loans, not private loans! Delay your private loans as much as possible!)

Next, try to spend $8000 from non-529 sources (including parent loans, but not including student loans). This maximizes your AOTC credit. Paying 4000 out of your non-tax-advantaged income or assets or even from a PLUS loan makes you eligible for a 2500 AOTC credit (per child). This is generally too good of a deal to pass up, even if you do have to take a loan to get it. (Run the numbers in TurboTax to make sure it works for you - the credit can be phased out at higher incomes, and only up to 40% of it is refundable if you normally owe little in taxes.) You will only get this credit for four tax years - My CPA advised working towards making your student independent by the 5th tax year so that they can take the lifetime learning credit on their own return for that last tuition bill once the AOTC has run out.

After that, spend down your 529 funds before taking any further parent loans or private student loans.

11

Actually, funds from student loans, if used to pay qualified educational expenses, can be part of the $8000 used to qualify for the AOTC. For a dependent student, money they pay for tuition etc. is deemed paid by the parent for purposes of the AOTC.

12

@MsSunshine15, I agree, if you have two in college you might qualify for financial aid.

So I would spend the 529 in the first few years so parent asset balance is reduced, also junior and senior year the loan amount goes up to $7500.

So if you have less in assets you might qualify for more FA.

If the twins work in the summers and you can get the AOTC every year for four years, that might very well cover the $4,000 out of pocket amount needed for AOTC claim.

They can take out their student loans in the first two years also and bank them, if kept separate from other money it will not have to be figured in for student asset on FAFSA.

Of course this will have to be coordinated with scholarships and 529 funds as well.

For example, the twins attend a state school that costs $25,000 per year for tuition, fees ($14,000), room and board ($11,000).
They get $10,000 a year in scholarship and grants. So remaining cost is $15,000.

So you will need $120,000 for both of them for four years.

Let’s say you have $44,000 in the 529

So year 1 you pay $4,000 out of pocket for tuition (twins contribute most of their summer earnings, so assets are not in bank by the time FAFSA is filed in fall). You pay room and board of about $11,000 from 529.

If you qualify income wise (I think married filing jointly can have MAGI of $160,000) you can claim $4,000 of tuition, fees, books (QEE) for up to $2,500 AOTC per child.

The balance after $22,000 withdrawal ($11,000×2) will be $22,000

Twins can take their $5,500 loan and save it. Does not have be included in student asset for FAFSA.

Year 2 you pay $4,000 out of pocket again for QEE and pay $11,000 for R&B from 529. Out of pocket can be paid with student summer earnings and AOTC credit.

The 529 will be spent. Twins can take up to $6,500 loan and bank them.

Year 3 the twins can pay the $15,000 with $12,000 from their banked loans and summer earnings or you can pay remaining $ with AOTC credit.

They can take out up to $7,500 of student loan and bank it.

Year 4 the twins can pay $15,000 with $7,500 banked loan and summer earnings and rest with a new loan and AOTC.

Remaining AOTC can be spent towards paying off student loans.