529 plans can be used to pay for a variety of expenses related to attending a college or university. Some expenses are straightforward and go directly to a department on campus, such as tuition. Others can be purchased elsewhere. For example, many students opt to buy used books through Amazon rather than the college bookstore.
Given the variety of ways that you can purchase your expenses, you may be wondering what is the best way to use the 529 plan to pay for qualified educational expenses. There are three ways you can pay for expenses using the 529 plan:
Send the money directly to the institution, account holder, or beneficiary
Withdraw the funds and submit a check or cash to pay for expenses
Pay for an expense and reimburse yourself
Can I Reimburse Myself from My 529 Account?
As the account holder, you can reimburse yourself for education expenses that you paid from your personal funds. For example, while searching for off-campus housing you may pay first month’s rent for an apartment immediately to reserve the place, and later reimburse yourself for the expense. Although you can reimburse yourself, it’s important to make sure that the expenses that you reimburse yourself for are qualified expenses.
Two important things to remember about qualified expenses:
Qualified expenses include tuition, books, computers and tech, other school equipment, room and board
Remember to withdraw tax-free aid, such as scholarships and grants from estimated costs to determine how much money you can use from a 529 plan
Some plans will send a check or EFT (electronic funds transfer) when the account holder submits documentation for reimbursement. With other plans, you may be able to write a check directly to yourself as the account holder.
Notes of Caution
Keep meticulous records, including receipts and documentation for all expenses and reimbursements. In addition, it may be wise to keep a ledger of all expenses in the event of an audit. The IRS may not request documentation the first or second year you use the 529. However, it’s best to maintain complete records for every year in case they do so in the future.
Tax / Academic Year
Be sure to use the distribution in the same year that you make the withdrawal and follow the same rules when reimbursing yourself. Because the academic year begins in the fall, only about four months before the New Year, you may withdraw excess funds one semester, and plan to use it the next. However, if you fail to use money from a 529 plan in the same year that you made the withdrawal, you may be subject to taxes and penalties.
The best scenario is to pay for expenses directly from the 529 account to the academic institution or other vendor. While you are permitted to reimburse yourself from your 529 plan, it’s important to keep detailed records to avoid penalties in the event of an audit.