Aug 16, 2023
529 Distributions – Getting Your Bucks in a Row
If it’s time to tackle fall semester tuition bills, read on! Having established and contributed to a 529 education savings plan, you’ve positioned your family well. This article discusses how to get the 529 “bucks in a row” to avoid common missteps in funding your next generation’s higher education.
Not all of the expenses incurred will meet the criteria for an educational expense that qualifies for the 529 tax benefits. When in doubt, it’s a good idea to measure twice before cutting the check, just to make sure. The following table illustrates common major expenses and whether they qualify as education expenses.
Type of expense
Is it a qualified education expense?
Tuition and fees
Yes, up to the full amount of college or vocational school tuition and required fees. Limited to $10,000 per year for K–12.
Books and supplies
For college expenses only
Computers, software and internet access
For college expenses only
Room and board
For college expenses only, if the student is enrolled at least half-time
Special needs equipment
For college expenses only
Transportation and travel costs
No, costs associated with transportation to and from campus, such as airfare or gas, are not qualified education expenses
No, even health insurance policies offered by a school are not considered qualified expenses
College application and testing fees
Extracurricular activity fees
Yes, with a lifetime limit of $10,000
Common scenarios and issues
• Housing expenses
For those students who live off campus, rent is still an eligible expense, up to the published costs on the website. The institution’s financial aid office should be able to confirm this figure as well. Off-campus food will also qualify in the “board” definition, but again, aggregate charges for room and board redeemed should not surpass the published charges on the website.
Since off-campus charges are not reported on the 1098-T,1 we recommend saving these receipts for those charges that are reimbursed.
• Study abroad
A main consideration when determining whether costs related to studying abroad are eligible expenses is to ensure that the foreign partner school is a qualifying school for federal aid purposes. You may do this by visiting the Department of Education’s website, referencing the “Look Up a School Code” feature and selecting “Foreign Country.”
• Taking too much
In the event that you look back and realize too much has been taken from the plan within the last 60 days, you may take what was distributed and roll it over to a different 529 plan. By depositing the excess funds into another 529 plan and having it coded as a rollover, you may avoid the withdrawal being designated as a taxable event. If you’re considering this strategy, it should be confirmed that there have been no other rollovers within the past 12 months. If you are beyond the 60-day window, then you may look to prepay next year’s expenses.
• Taking too little
529 plans have seen favorable legislation come out over the last several years, and there continues to be more talk of expanding what a 529 may be used for. For those with multiple children going to school, you may be aware of the ability to shift the account beneficiary to another child. Other options since January 2018 have included the option to withdraw money for K–12, as well as a limited amount to pay down student loans. If you received a deduction on contributions to a 529 plan, we believe it would be wise to ensure the state where you received the deduction is also following the new, expanded federal rules for additional expenses; otherwise, your state may end up taxing you for those withdrawals!
• Get the timing right
Withdrawals from a 529 plan should match up with the qualifying expense in the same calendar year. For example, if you withdraw money in December for bills that are not paid until January, you risk having to pay taxes on those funds.
Once you have sized up your qualified expenses and are ready to contact the 529 institution for the withdrawal, we suggest paying the funds directly to the individual. When an educational institution receives payments from third parties, it may be misconstrued as a scholarship/grant, which could adversely impact any federal, state or institutional aid. This undesirable result is referred to as “scholarship displacement.”
We always strive to ensure that good planning does not negatively impact aid or taxes when it comes time to use the 529 plan. These recommendations are just some of the things to keep in mind. Reach out to your Wealth Advisor to confirm that your 529 bucks are, indeed, in a row.
1 A 1098-T is a tax form to help substantiate fees paid to the university. Save this tax form with your other supporting documents.
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