Smart Ways to Maximize Your 529 Withdrawals

Soon, acceptance letters to colleges will be sent out, and your student will have to choose 529 plans. And you’ll soon see what seems like an endless stream of fees for a deposit, tuition, and other things.
The best thing about 529 plans is that you can get tax breaks from them. But you can lose all of these benefits if you make a mistake with how or when you take money out of the account. Here’s a quick rundown of what you need to know to avoid those mistakes and get the most out of your money.

Who can use the 529 funds?

Distributions from a 529 can only be used for the child the account was set up for, who is called the designated beneficiary. So, if you have money in a 529 account for a sibling that you know they won’t use, you can’t take it out to pay for another child.

The good news is that there are ways to change an account’s beneficiary or move money between accounts of family members. Different 529 plans have different details. Read this guide or talk to the person in charge of your 529 plan to find out more.

What expenses can I pay with 529 funds?

The money in your children’s 529 can be used for a wide range of “qualified educational expenses,” as the IRS calls them. Those costs include things like:

Tuition and fees; books, supplies, equipment, including a computer and software; room and board for students enrolled at least half-time; and costs for special-needs services.

Even though 529 funds can be used to pay for a wide range of fees and expenses, the IRS has rules about which fees and expenses count and when. For instance, room and board expenses are allowed, but that doesn’t mean that every dollar spent on rent is a “qualified” expense. (You didn’t really think the IRS would make it that easy, did you?)

The amount you can count as a qualified expense can’t be more than the cost for your student to live in school-owned housing or the amount the school sets aside for room and board as part of the cost of attendance for financial aid purposes.

What happens if you use 529 distributions to pay for expenses that the IRS says aren’t qualified? You’ll have to pay taxes on that withdrawal, which means you’ll lose the main tax benefit of your 529 plan.

Reminding you that everyone’s tax situation is different and that some of the IRS rules aren’t clear-cut. So, a cost that might not count as a qualified expense for one family might be for another. If you have a specific question, ask your tax preparer or, if you like to do things yourself, read the IRS’s guide on the subject.

Timing is very important.

Any money you take out of a 529 plan must be used for any costs you have in that calendar year. That’s not an issue for most of the year. However, if you have tuition or other bills due in January, you’ll want to use the money you took out in January, not money from the previous year.

Also, if it’s almost the end of the year and you took out $10,000 at the beginning of the year but haven’t spent it all yet, make sure you find legal ways to spend it all. For example, you might be able to prepay certain expenses.

Care to guess what happens when the timing is wrong? The winner is the person who said, “I’ll have to pay taxes on the extra money.”

Is a 529 refund possible?

Sometimes, you can get a partial refund on college costs you’ve already paid for. For example, if your child got a late-arriving scholarship or if the college recalculated its lab fees, you might get some of your money back. Yay! But if you paid for it with money from your child’s 529 plan, you’ll need to move quickly.

This amount must be put back into the 529 plan within 60 days. If you miss the deadline, it’s considered a non-qualified distribution, and you’ll have to pay taxes on the amount that was refunded.

Of course, most people can’t use their 529s to pay for all of their college costs. So, if there are other college costs you didn’t pay for with 529 funds, you could use the money you got back to pay for those instead. (For example, let’s say you paid for your child’s tuition with money from a 529 plan, but you paid for his or her meal plan out of pocket. (If a course fee you paid with 529 funds was refunded, you could use that amount to pay for your meal plan.)

Again, every circumstance is unique. If you have questions, talk to a financial advisor, a tax preparer, or the person in charge of your 529 plan.

Another way to get the most out of your 529 is to make sure your student gets as much free money as possible by applying for scholarships. For example, you can apply for a $2,000 scholarship right now.

About James G. Barr

I am an international student. I am a doctoral student and teaching assistant at a University in the United States. Aspiring students looking to make their educational dreams come true, we offer generous scholarships to help you reach your goals.

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