Strategies for Withdrawing Money from Your 529

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After all that time saving in a 529 college savings plan for your student’s college education, it’s time to finally spend the money on their college education.

 

We talked to Betty Lochner, the 529 National Awareness Campaign liaison, to get her best advice on strategizing 529 plan withdrawals.

 

Here’s what you need to know:

 

What kind of schools you can use 529 plans for 

 

529 plans aren’t just for saving for four year universities. You can use 529 plan savings for paying for anything from technical schools to four year schools.

 

Thus, your family can discuss the range of options for education post graduation for using 529 plan funds. Career discussions and exploration should always be part of college planning.

 

What expenses can be withdrawn

 

You can withdraw funds for tuition and fees, room and board, textbooks, computers, and equipment. However, there are times when you should be very careful about keeping receipts.

 

If expenses are for room and board for a student living at home, keep good receipts and be able to explain how much of your mortgage or rent is for the student. 

 

When it comes to cost of equipment or computers, you have a school required reason for an item to cost much more than the average item. For instance, I spent $6,500 on camera equipment for school, but the school had $10,000 listed as the suggested expense. Since, I spent less than the cost of attendance estimate, it’s withdrawable from 529 accounts without a tax penalty.

 

One expense that isn’t allowed to be withdrawn is travel. 

 

How to withdraw funds

 

Find out when payments are due for expenses such as tuition and fees and room and board. Miscalculating payment dates could cause your student to be dropped from classes or lose their spot in dorms.

 

Request payments two weeks ahead of due dates for withdrawals to guarantee payments are made on time. Because 529 plans contain investments, it can take time for accounts to settle after enough mutual funds are sold to cover the amount you withdraw. Payments may be faster if the withdrawal is from money market or savings accounts that are already cash within the 529 plan.

 

Also, plan on extra time for making a payment to a school if you request the money to be sent to you instead. The reason is you’ll then take time to pay the school yourself.

 

Luckily, electronic transfers make payments to anyone much faster than it used to be. The actual request can be made either online or by phone, depending on the rules of your individual 529 plan.

 

What your long term withdrawal strategy is

 

Ideally, planning for 529 plans start in junior year of high school or early. he reason why is when you plan 529 plan withdrawals, you’re also considering overpaying for college and financing strategy. The start to the process is always looking for colleges within your physical and student loan budget.

 

After you’ve evaluated your budget, you can think about how you’d like to divide up your 529 plan savings. For instance, I told my kids, I’ll pay for your first four years and you’ll have to pay for grad school if you decide to go, says Lochner. 

 

However, knowing they have enough saved for their undergraduate years, they could have saved the money for grad school and paid for their own undergraduate educations with scholarships, work, and loans. Many families choose this strategy because loans for grad school are issued by the federal government at a higher interest rate than for undergraduate loans.

 

Note: Because 529 plans have tax benefits such as not paying taxes on growth, you can’t withdraw money from a 529 plan for expenses that are paid later by tax credits. If you meet the requirements for the American Opportunity Credit, don’t pay for the first $4,000 of tuition and fees with 529 plan funds. You could lose out on up to $2,500 back on your tax return.

 

5 Takeaways

  • 529 college savings accounts can be used for post secondary education from technical schools to four year universities.
  • In order to withdraw funds without tax penalties or income tax collected, you have to use the money to pay for qualified expenses such as room and board, tuition and fees, computers, textbooks, and required equipment.
  • Keep receipts and prepare a good explanation for equipment that’s on the pricey side. You’ll need to have some evidence that your student really needed to spend that much.
  • Don’t give up tax credits because you saved in a 529 plan.

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