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529 Distributions – Getting your bucks in a row

    Posted by on August 4, 2022
    3 min read

The time of year has come to tackle Fall semester tuition bills! 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 any missteps in funding your next generation’s education. 

Qualified Expenses

Not all of the expenses incurred will meet the criteria for an educational expense and therefore qualify for the 529 tax benefits. When in doubt, it is a good idea to measure twice before cutting the check.  The below table illustrates the major eligible expenses. 

Type of expenseIs it a qualified education expense?
Tuition and feesYes, 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 suppliesFor college expenses only
Computers, software and internet accessFor college expenses only
Room and boardFor college expenses only, if the student is enrolled at least half-time
Special needs equipmentFor college expenses only
Transportation and travel costsNo, costs associated with transportation to and from campus, such as airfare or gas, are not qualified education expenses
Health insuranceNo, even health insurance policies offered by a school are not considered qualified expenses
College application and testing feesNo
Extracurricular activity feesNo
Student loansYes, with a lifetime limit of $10,000

Source: Saving For College (https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan

Common Questions

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 also be able to confirm this figure. Off-campus food will also qualify in the “Board” definition, but again, aggregate room and board charges 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 study abroad expenses are eligible expenses is making sure 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”, please reference the link below the blog. 

Taking too much

In the event you look back and realize too much has been taken from the plan within the last 60 days, you have the ability to 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 a taxable event. If this is being considered, 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, it would be wise to ensure the state where you received the deduction is also following the new federal expanded rules for additional expenses, otherwise your state may end up taxing you for those withdrawals! 

Getting it just right

Withdrawals from a 529 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 aid from the federal, state, or institution. This result is called “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. These recommendations are just some of the things to keep in mind. Reach out to me or your Wealth Advisor at RegentAtlantic if you are wondering if your 529 bucks are in a row. 

Sources

https://studentaid.gov/fafsa-app/FSCsearch

https://www.savingforcollege.com/article/using-your-529-plan-to-pay-for-room-and-board

https://www.savingforcollege.com/article/can-you-use-a-529-plan-to-pay-for-travel-costs

https://www.savingforcollege.com/article/can-you-use-a-529-plan-to-pay-for-health-insurance

https://www.savingforcollege.com/article/can-a-529-plan-be-used-to-pay-for-college-application-fees

https://www.savingforcollege.com/article/can-you-use-a-529-plan-to-pay-off-student-loans

https://www.savingforcollege.com/article/scholarship-displacement-winning-scholarships-means-losing-financial-aid


[1] 1098-T is a tax form to help substantiate fees paid to the university that you should save with your other supporting documents

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