It’s Back to School Time! Here’s How You Can Use Your 529 Plan

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.

1. https://www.fidelity.com/learning-center/personal-finance/college-planning/college-529-spending

2. https://www.consumerreports.org/paying-for-college/how-to-withdraw-money-from-a-529-college-savings-plan/

3. This list covers many, but not all, qualified expenses

4. https://www.finra.org/investors/highlights/tapping-your-529-plan-first-time-tips-freshman-parents

5. https://www.savingforcollege.com/article/avoid-these-529-withdrawal-traps?page=2

This article contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Reading or utilizing this information does not create an advisory relationship. An advisory relationship can be established only after the following two events have been completed (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement. There is no guarantee that the views and opinions expressed in this article will come to pass.

Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (http://www.adviserinfo.sec.gov).

For additional information about SWP, including fees and services, send for our disclosure brochure as set forth on Form ADV from SWP using the contact information herein. Please read the disclosure brochure carefully before you invest or send money (http://www.stratwealth.com/legal).

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