Guidelines for Using 529 Funds

This post is Part Two of a three part series on Oregon’s 529 College Savings Plan. In Part One, we looked at recent plan changes. In this installment, we share how to withdraw funds from your plan.

Hard to believe, but it has been 15 years since we first researched 529 college savings plans to come up with best recommendations for our clients.

Back then, these clients had preschoolers. Today, these “preschoolers” are about to head to college.

It’s now time to put those diligently accumulated 529 funds to good use.

Here are some tips for getting started.

What Qualifies for Tax-Free Withdrawals?

First off, keep in mind that expenses and qualifying 529 distributions must occur in the same calendar year.

Qualifying expenses include tuition, fees, books, supplies, computers, and computer-related equipment. Room and board also qualifies as long as your student is enrolled at least half-time.

One caveat: If your student plans to live off campus in housing not owned or operated by the college, you cannot claim expenses in excess of the school’s estimates for room and board.

Do I Need to Keep Records?

Yes. While the 529 plan administrator calculates the earnings portion of any withdrawal, you must keep accurate records and receipts of qualified expenses for the IRS.

If withdrawals are equal to or less than your student’s qualified higher education expenses (QHEEs), then withdrawals—including all earnings—are tax-free.

If withdrawals are greater than QHEEs, then taxes, and a possible penalty, will be due on earnings that exceed qualified expenses.

What’s Better—Direct Transfer or Reimbursement?

To simplify record keeping, you’ll probably want to make payments directly from your 529 plan to your student’s educational institution.

If you go this route, allow ample time for the 529 plan to process the request. The plan will need to sell securities and issue a check, and the school will need time to process the payment.

Alternatively, you can pay expenses directly and then request reimbursement from the 529 plan.

Any Other Tips?

In an appropriately structured age-based 529 plan, investment growth slows substantially and plan investments assume less risk as the beneficiary nears college age.

With college inflation costs potentially outpacing a 529 plan’s growth potential at the tail end of age-based plans, what should you do?

One option is to pay a few years of tuition up front in your student’s freshman year. This can take the bite out of potential inflation and reduce total tuition by thousands of dollars.

Most institutions will gladly accept funds early and will offer refunds in the event a student transfers to a different school. Be sure to check school policies.

Why Did I Receive a Tax Document?

If you paid your student’s first college tuition bill in the previous calendar year, expect to receive IRS Form 1099-Q. This form is produced when you withdraw funds from college savings plan accounts.

Don’t fret—this amount is not subject to tax. Form 1099-Q simply records distribution amounts. Be sure to provide this document to your tax preparer.

Where Can I Find Help?

Just as we advised you 15 years ago on the best 529 plans available, Vista is here to help as you send your student off to college.

 

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