As you save money into your kid’s 529 plan each month, do you ever wonder: How do I get the money out to pay for college? Even if your child is not ready to start college yet, you may have some fleeting anxiety about accessing your funds. Here are some answers to ease your mind.
1. Request a 529 withdrawal online
When you’re ready to access the money in your child’s 529 to pay for college expenses, you request a withdrawal from the account for the amount needed to cover the current expense. Most 529 plans will allow you to request a withdrawal online.
Typically, you can request the funds be sent to one of three places: To your bank account, to the beneficiary’s (your child’s) bank account, or directly to the school.
2. It’s the honor system
You are not required to provide receipts or other evidence to the 529 plan that the money will be used for eligible college expenses. This isn’t like an FSA (flexible spending account). It’s the honor system. Well, unless the IRS comes around later and asks for proof.
As with most of our tax system, you need to keep good records, along with receipts and documentation, in case the IRS asks to see it. You need to keep evidence that you spent the 529 money on “qualified education expenses” as defined by the IRS, and be prepared to show this evidence if the IRS asks.
The 529 plan will send you a Form 1099Q at tax time for any withdrawals you made. If all the withdrawals were for qualified expenses, no action is needed on your tax return. Just keep the 1099Q with your other records.
3. Mind the tax year
It’s important to make 529 withdrawals in the same tax year that the expense is incurred. In your recordkeeping, you want total withdrawals to match up to eligible expenses within one tax year. This can be trickiest around paying for spring semester tuition and fees. Don’t withdraw money in December for a bill that won’t be paid until January.
4. Reimburse yourself
It’s fine to pay for qualified expenses out of pocket and then make a 529 withdrawal to reimburse yourself. In many instances, that’s the easiest way to do it.
However, for tuition and fees, it’s often best to instruct the 529 plan to pay the school directly.
5. What if you make a 529 withdrawal for non-qualified expenses?
Don’t forget, you can withdraw 529 funds at any time, for any reason. If you withdraw money without a corresponding qualified expense, you will have to pay taxes on the earnings portion of the distribution, along with a 10% penalty on those earnings.
Remember, the money you originally contributed to the 529 was after-tax. If you withdraw it for non-qualified reasons, you only owe tax and penalties on the investment growth portion of the distribution.
Feel confident about saving into a 529 plan
These tips should make the withdrawal process more concrete. With an understanding of how it works on the back end, you can continue to confidently save into a 529 plan for your kids’ college education.
If you have questions about saving for college, with 529s or alternative strategies, please reach out and schedule a complimentary consultation. Or learn more about our financial life planning services here.
About the Author
Gretchen Behnke, CFP®, RLP®
Gretchen Behnke is a fiduciary financial planner in Plano, TX. Pearl Financial Planning is a fee-only firm providing full financial planning and investment management services to independent professional women and couples. Serving local clients in-person or virtually, and virtual meetings for clients across the country.