What Do I Need to Know About 529 Plan Withdrawals?

Parent and child saving for college.

 

There is so much to think about when you send your child off to college. You thought ahead when you decided to open a 529 Plan. But before you start taking money out and writing checks to the school, you have some homework to do. Here are some things you need to know about 529 Plan withdrawals.

What are Qualified Expenses?

The money grows tax-free when used for qualified education expenses. Still, before you can enjoy these tax advantages on your 529 Plan withdrawal, you need to know what qualifies before you start spending. Tuition, mandatory fees, books, supplies and equipment required for enrollment all qualify. Does that include a laptop? If it will be used primarily by the student while at school, it qualifies. Games for the computer aren’t covered.

What about room and board? As long as your student is enrolled at least half-time, it is covered. They don’t have to live in on-campus housing. If the student lives off-campus, you should find out from the school what on-campus housing allowance figure the institution uses for federal financial aid purposes. That will be the number that is considered a qualified expense for your 529 Plan.

Your student can live in an apartment that costs more than a dorm. But, you can only use money from your 529 Plan up to the amount the dorm would have been. This is the same figure the institution used for federal financial aid.

Many people don’t know that you can also use the NC 529 Plan to pay for more than college. As of 2018, your NC 529 Plan can be used to cover the cost of K-12 tuition. You can use money from your 529 plan to pay up to a total of $10,000 per student, per year, in tuition expenses at public, independent, or religious schools.

You cannot use the money from your 529 Plan to pay for the cost of transportation to and from school. It also does not cover insurance.

Regardless of how you spend the money from your NC 529 Plan, you do need to keep records of what you spend your money on. The IRS could ask for proof.

Look Ahead for 529 Plan Withdrawals

Before your first tuition bill is due, you need to talk to your plan provider and find out how much time they need to process a request for a 529 Plan withdrawal. Most accounts have mutual funds or short-term bonds that need to be sold or traded. This can take five to ten days to complete. Resist the urge to take the money out too far in advance. Distributions must be made in the same year as the qualifying payment. In other words, you can’t take money out in December to make a tuition payment in January. Planning ahead is key.

Where Do I Send Funds from My 529 Plan?

You could decide to have the payment sent directly to your child. They would then need to make the tuition payment and pay for any other expenses that money is intended to cover. The student would also need to keep careful receipts of everything. The upside is that if you have taken out too much and some of the expenses are non-qualified (aren’t on the list above), the earnings would go on your student’s tax return. Most likely, your student earns much less than you do. The downside is that most college students are not as good at keeping records as we’d like them to be.

You might opt to have the payment sent to you. This allows you to control how it is spent and how the records are kept. A good way to have a receipt for the tuition paid is to pay directly through the school’s website. If you do pay by check, have your child hand-deliver it to the accounting department and get a receipt that way.

Saving for College is Always a Smart Investment

Saving for your child (or grandchild or niece or nephew) in a 529 Plan is always a smart investment. The money can be spent at thousands of institutions around the world! In North Carolina alone, there are 173 schools that qualify. There are also about 400 international schools that qualify. And they aren’t just universities. Technical schools, community colleges, a culinary academy, beauty colleges, and schools of Chinese medicine are all on the list. Search the list provided by FAFSA to make sure your student’s school qualifies.

With your NC 529 Plan, and a plan for using it wisely, you and your student will have a successful school year. Start saving when you open your NC 529 Account today.