After years of dedicating funds to your child's college savings, the big day has arrived—they're heading to campus with a strong backbone of financial support in their 529 plan. The 529 will cover many education expenses, but to have these funds last as long as possible, you'll want to access those funds strategically.
Sticking to the 529 plan withdrawal rules not only helps your child focus on their education without financial stress getting in the way, but also helps ensure you make the most of this college savings plan and its numerous tax incentives.
529 withdrawal rules: What qualifies?
The contributions you've been making have allowed earnings on those dollars to grow tax-deferred. Now that it's time to spend that money, any distributions will be tax-free for certain qualified education-related expenses.
Qualified education expenses
Qualified education expenses are costs related to enrollment or attendance at an eligible educational institution. They include:
- Tuition and fees
- Required books, supplies and equipment
- Special-needs services necessary to enroll or attend an eligible school
- Room and board for students enrolled at least half-time
- Computers, peripheral equipment, software and internet access used while the student is enrolled
- Fees, books, supplies and equipment required for an apprenticeship program
- A one-time withdrawal of up to $10,000 of student loan principal or interest
- A one-time withdrawal of up to $10,000 for elementary, middle or high school tuition
If you spend the money on nonqualified education-related expenses, you could face state and federal taxes on the withdrawals and, barring some exceptions, you'll also have to pay an additional 10% penalty on the earnings portion of the withdrawal. (It's important to note that you always can withdraw the after-tax money you originally contributed, minus the earnings, tax- and penalty-free.) Examples include:
- Living expenses beyond room and board charged by the school, such as transportation and personal items
- Sports or club activity fees, insurance and other costs not required for enrollment or attendance
- Computer software for sports, games or hobbies
How to calculate 529 plan expenses
As the owner of a 529 plan, you get to choose when and how much money you'd like to withdraw from the account. Consider these steps to find the adjusted qualified education expenses for the year. You can withdraw this amount from your 529 plan without affecting your taxes.
- Start with your bills from the school. These are typically the more straightforward expenses, such as tuition and fees. Don't forget to include room and board if your teen is enrolled at least half-time, plus any expenses for special-needs services if applicable. Get a statement from the school's Bursar's or Student Account's office if you don't have records of those payments.
- Add other qualified expenses. Tack on any additional expenses you or your child paid during the year, such as textbooks purchased at the campus bookstore or online, a new computer, internet service fees or student loan payments. Gather those receipts and add those expenses to your total.
- Subtract tax-free educational assistance. This would include any Pell grants, scholarships, fellowships, employer-provided educational assistance and veterans' educational assistance.
- Subtract expenses used to claim tax credits. If you used any education expenses to claim education tax credits, such as the American Opportunity Tax Credit or the Lifetime Learning credit, you can't "double-dip." Subtract those expenses from your total.
Save too much in a 529 plan?
How to strategically plan your 529 withdrawals
Knowing what you can spend your 529 savings on and how much to withdraw is just the start. Now's when the strategic timing and considerations come into play. Keep these tips in mind to ensure your savings can go as far as possible:
Time your withdrawals just right
According to IRS rules, you must make 529 withdrawals in the same calendar year—not the academic year—you pay for the expenses. While it would be ideal to plan ahead, you can't withdraw funds in anticipation of upcoming expenses.
Considering this calendar year rule, you may want to check on your expenses near the year's end and make any needed "catch-up" withdrawals. Still, with that in mind, you don't want to wait until the very last minute. You want to give your account's admin team time to process your request. If you try to use funds for expenses in a different calendar year, you could run into fees and penalties.
Match your withdrawals to expenses
While there's no maximum amount you can withdraw each year, you should withdraw the exact amount you need to cover your adjusted qualified education expenses. Random, lump-sum withdrawals could draw IRS scrutiny. They'll be taxable (and subject to a 10% penalty) if you can't match them to specific qualified expenses.
Tap high-growth accounts first
It's not uncommon for parents to have multiple 529 plan accounts. For example, plans can differ between states. You may like another state's plan over your own but want to keep any potential residency incentives by also choosing your own state's plan. If you do have more than one account, it's likely they'll have different growth rates. So when it's time to start taking withdrawals, consider beginning with the account with the higher earnings ratio to maximize your tax savings.
That way, if your last child graduates with money remaining in a 529 plan and you want to take a nonqualified distribution, the account with the lowest earnings will be the one remaining. You'll face a smaller tax bill on those earnings than if your higher-yield plan was still in place. (You could have other options to roll over an
How to withdraw from 529 plans
When it comes to tactically withdrawing money from your account, the process can be straightforward:
- Log into your 529 plan account. Most plans allow you to complete a withdrawal request online.
- Request a distribution. The distribution request process varies depending on your financial institution. You typically need to provide your name and Social Security number, the beneficiary's name and Social Security number, contact information and the portfolio to withdraw from.
- Select the amount and destination. Enter the amount you want to withdraw and choose where to send the money. You can have the funds sent directly to the school, the student or you. If your entire withdrawal is for qualified expenses, the destination may not matter. But if there are nonqualified expenses, there could be tax implications.
- Keep records. Keep a record of your withdrawal, including the date, amount and qualified expenses you're paying in case of an IRS audit. Keep these records in a secure or backed-up location for seven years.
Putting your college savings plan to work
A 529 plan is an excellent option to help your child save for college expenses and reach their education goals. With a clear understanding of withdrawal rules and strategies, you can get the most out of your college savings.