Strategic Wealth Partners was acquired by Kovitz Investment Group Partners, LLC ("Kovitz"), a registered investment adviser with the SEC on May 1, 2024. Strategic Wealth Partners is now a division of Kovitz and its registered investment adviser. Materials created prior to this date were created by Strategic Wealth Partners and are accurate as of the time of publishing.
It’s Back to School Time! Here’s How You Can Use Your 529 Plan
August 22, 2019
What seemed so far away years ago is finally here – college! Since you have been diligently putting away money in 529 plans for your children, grandchildren, or other loved one, this is an exciting time. You have entered the withdrawal phase of your 529 experience.
Before you start to use 529 account funds, check to see if you qualify for other tax incentives the federal government may offer. Two of the more common tax credits are the American Opportunity Tax Credit and the Lifetime Learning Credit. Note that each of these credits has their own restrictions and you can only use one per year1. Additionally, it is crucial to be mindful about how you use these credits in conjunction with 529 plan distributions. The IRS does not allow you to use tax credits and 529 distributions for the same expenses2.
As a refresher, 529 plans are a savings vehicle designed specifically for education that allows you to put away money for college (and in some cases other educational purposes). The money you save in these accounts grows tax-deferred, and if used for qualified higher educational expenses, these dollars are tax-free at the time of withdrawal. If you use the funds for non-qualified expenses, the earnings portion of the distribution will be subject to ordinary income tax AND a 10% penalty.
What expenses can I pay with my 529 plan?
Qualified Expenses3:
Tuition
Fees
Books
Supplies & equipment required for enrollment
Computers (if used for school)
Room and board
Non-Qualified Expenses:
Transportation
Extracurricular activities, including fraternities and sororities
Insurance and medical bills
College application and testing fees
Student loans
How do I withdraw money from my 529 plan?
Below are a few ways you can withdraw the funds from the 529 account after you receive the first tuition statement:
Pay the bill first and reimburse yourself from the 529 account
Transfer the 529 funds to your bank account and pay the bills from there
Direct the 529 plan to send the check directly to the school
Distribute the 529 funds to the beneficiary, so he/she pays the bill
I do not recommend this since the beneficiary would have control of the funds (not the owner) and it could impact the beneficiary’s financial aid eligibility
If you have a plan through Strategic Wealth Partners, we can help facilitate the payments
In Illinois and Wisconsin, you can withdraw funds from your 529 account by completing a withdrawal request form online. You can view the Illinois form here and the Wisconsin form here.
What happens if the beneficiary lives off-campus or in a fraternity or sorority house, is it still considered a qualified expense?
On-campus housing is considered a qualified expense. The qualified room and board must be equal to or less than what the college has listed in their annual cost of attendance allowance for room and board. So, if the college has room and board listed in their cost of attendance as $5,000 and you want to spend $7,000, only $5,000 is a qualified expense and can come from the 529 account without taxes and penalties. The other $2,000 must come from another source. Conversely, if the cost of attendance is $5,000 for room and board, and you only spend $4,000, you can only use $4,000 from the 529 plan assets.
Is the timing of 529 distributions based on the school year or the calendar year?
When using the money in a 529 plan to pay for qualified educational expenses, you must match the funds from the plan in the calendar year you use the money. According to FINRA.org, “Any qualified expenses you incur must align with withdrawals from a 529 account in the same year4.” For example, if the account owner takes a distribution in January 2020 for a December 2019 expense, it would be non-qualified5. You can avoid this situation by having the 529 account custodian send the funds directly to the school.
What happens if my child decides not to go to college or doesn’t use all the money?
Even if your child’s path doesn’t include post-secondary education, you still have options. Since the account belongs to the owner, you have the right to change the beneficiary to a family member (sibling, first cousin, aunt, uncle, or even yourself). The same rule applies if the original beneficiary does not use all of the funds. Since there is no time limit or expiration on when you can use the funds, it may be a great planning tool for future generations.
You’ve spent years prudently saving for college. By using the funds from your 529 plan properly, you can make the most of your savings. Keep in mind that each state has different rules, so make sure to check with your state. You can read my previous blogpost on 529 FAQs to learn about the myriad of features they offer here. As always, we are happy to help if you have additional questions.
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