Navigating Your 529 Plan Withdrawals: A Guide
Accessing the funds in your 529 plan to pay for education expenses is a straightforward process, but understanding the rules is key to maximizing the tax benefits. This guide provides a general overview of how to withdraw from your 529 plan. Remember to consult your specific 529 plan's disclosure document or contact the plan administrator for details pertinent to your account.
Key Takeaways:
Qualified Expenses are Key: Withdrawals are federally tax-free when used for "Qualified Higher Education Expenses" (QHEEs).
Timing Matters: Withdraw funds in the same calendar year the expenses are paid.
Keep Good Records: Maintain all receipts and invoices related to educational expenses.
What Are Qualified Education Expenses (QHEEs)?
QHEEs generally include:
Tuition and mandatory fees
Books, supplies, and equipment required for enrollment or attendance
Computers, peripheral equipment, software, and internet access used primarily by the beneficiary while enrolled
Room and board for students enrolled at least half-time (costs cannot exceed the school's official cost of attendance allowance for room and board, or the actual amount charged if living in school-operated housing)
Expenses for certain apprenticeship programs (fees, books, supplies, and equipment)
K-12 Tuition: Up to $10,000 per year, per beneficiary, for tuition at an elementary or secondary public, private, or religious school.
Student Loan Repayments: A lifetime limit of up to $10,000 per beneficiary (and $10,000 for each of the beneficiary's siblings) can be used to pay principal or interest on qualified education loans.
How to Make a Withdrawal:
The process for withdrawing funds typically involves the following steps:
Determine Your QHEEs: Calculate the total amount of qualified expenses for the academic period. Remember to subtract any tax-free educational assistance, such as scholarships or grants, and any expenses used to claim education tax credits like the American Opportunity Tax Credit (AOTC). It's often beneficial to claim the AOTC first.
Contact Your Plan Administrator:
If your plan is managed through a financial professional, contact them to initiate the withdrawal.
For direct-sold plans, you'll typically log in to your account online via the plan’s website to request a withdrawal. Options to request withdrawals by phone or by submitting a paper form are also common.
Choose the Recipient of the Funds:
Directly to the Educational Institution: Many plans allow you to send payments directly to the school. This can simplify record-keeping. You'll likely need the student's ID number and the school's address.
To the Account Owner: You can have the funds sent to your bank account, and then you pay the educational institution.
To the Beneficiary: Funds can also be sent directly to the student, who then pays the school.
Specify the Withdrawal Amount: Indicate the exact dollar amount you wish to withdraw. If you have multiple investment portfolios within your 529, you may be able to choose which ones to withdraw from, or the withdrawal may be prorated.
Submit Your Request and Allow for Processing Time:
Electronic transfers to a bank account typically take 3-5 business days.
Checks mailed to you, the beneficiary, or the school can take 7-10 business days or more.
Plan ahead, especially for tuition deadlines, and don't wait until the last minute.
Important Considerations:
Timing is Crucial: You must withdraw the funds in the same calendar year that the qualified expenses were paid. For example, if you pay for the spring semester in December 2024, you must withdraw the 529 funds by December 31, 2024. If you pay in January 2025, withdraw the funds in 2025.
Record Keeping: While your 529 plan administrator may not require you to submit receipts when you make a withdrawal, it is essential that you keep detailed records of all educational expenses. This includes invoices, receipts, and copies of checks or bank statements. You will need these records to prove your withdrawals were for QHEEs if the IRS audits you. You will receive an IRS Form 1099-Q from the plan administrator, which reports the total distributions for the year; ensure this aligns with your QHEEs.
Non-Qualified Withdrawals: If you withdraw funds for non-qualified expenses, the earnings portion of the withdrawal will be subject to federal income tax and4 typically a 10% federal penalty. State taxes and penalties may also apply.
Exceptions to the 10% Penalty: The 10% penalty may be waived in certain circumstances, such as the beneficiary's death or disability, or if the beneficiary receives a tax-free scholarship (you can withdraw up to the amount of the scholarship without penalty, though earnings are still taxed if not used for other QHEEs).
Coordinating with Education Tax Credits: If you plan to claim the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLTC), you cannot use the same expenses for both the tax credit and tax-free 529 plan withdrawals. Generally, it's more advantageous to use expenses towards the AOTC first. Consult with a tax advisor for personalized guidance.
Leftover Funds: If there are funds remaining after education is complete, you have several options:
Change the beneficiary to another eligible family member.
Beginning in 2024, you may be able to roll over 529 funds to a Roth IRA for the beneficiary, subject to certain conditions (e.g., the 529 account must have been open for at least 15 years, and annual and lifetime rollover limits apply).
Take a non-qualified withdrawal (and pay applicable taxes and penalties on the earnings).
Next Steps:
Review your specific 529 plan's rules for withdrawals.
Gather your invoices and bills for upcoming educational expenses.
If you have questions about your specific situation or tax implications, please consult with us or a qualified tax advisor.
We are here to help you navigate your 529 plan and make the most of your education savings.
An investor's or a designated beneficiary's home state may offer state tax or other benefits that are only available for investments in that state's qualified tuition program. An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement. The official statement should be read carefully before investing. This and other information can be found in the current program description, which can be obtained from your investment professional. The availability of such a state tax or other benefits may be conditional on meeting certain requirements.
A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59 1/2, death, disability
Information provided should not be considered as tax advice from GWN Securities, Inc. or it's representatives. Please consult with your tax professional.