How To Use Your 529 Funds For Your Kids’ Education

7 Steps You Need To Follow

Many of us scrimped and saved to put money away for our children’s or grandchildren’s college expenses. And now the chickens have come home to roost: your eldest will start college this fall, leaving you to face the dilemma of how, when, and how much to withdraw from your 529 plan.

My wife and I are facing this now, as our eldest grandson is about to take that giant leap and will enroll this fall. So after we got through pondering how he got to be this old so quickly, we and his parents had to start working out the best ways of tapping into the 529 plan we opened for him when he was born. They and you need to know how to maximize the funds, how to stay within the tax laws, and how to make sure these funds don’t jeopardize any financial aid the student will receive. Here are the answers! Be sure to check with your tax advisor before making your decisions. And be aware that not all post secondary schools and not all educational expenses are 529 eligible.

7 Steps to Using Your 529 Plan

1. The obvious first step is to check to see how much you’ve actually saved. Given the volatility in the recent market, you may be alarmed at the number staring at you from the screen. It’s likely that the number shrunk considerably, despite all your efforts to protect the principal.
2. Assuming there are still funds in the account, your next step is to determine how much of the first year costs the total amount will cover. Most colleges require a semester’s worth of payments just before the semester begins — August for a September start and December for a January start. Many colleges also have extended payment plans where you pay monthly and the payments begin several months before the semester begins. Chances are you’re too late to start a payment plan for this fall’s enrollment but you can consider this option for the second year.
3. Next determine whether the student is receiving any need-based financial aid. If not, then the proceeds from the 529 plan will not affect any financial aid award. Note that it could affect eligibility for future years if the funds are given to either the college or the student since it could be considered untaxed income to the student.
4. If the student is receiving need-based aid (even loans if the loan is a subsidized Federal loan), you’ll have to make certain the funds you forward don’t affect the student’s award. You or the student can check with the financial aid office at the college to make sure the proceeds do not affect the financial aid award.
5. Most 529 plans have an online presence that allows you to access your account. From that account you are able to take your withdrawal. Often that is referred to as a “sell” option since the funds are generally tied up in various equity accounts. From the “sell” menu you’ll likely see a list of all the individual funds that make up your 529 plan. Included with this list will be the amount that is in that particular fund. Make your selection for the amount you wish to withdraw.
6. You’ll then be asked to choose whether you want the funds sent to you (as the owner of the account) or directly to the college. You’ll get something like this on screen: Distributions made payable to the 529 owner will be reported on Form 1099-Q under his or her Social Security number. Distributions made to the 529 beneficiary or to an eligible college or university are reported on Form 1099-Q under the beneficiary’s Social Security number.
7. If you select having the funds sent directly to the college or university, you’ll likely be presented with a drop down menu where you can select the school. You’ll then be able to enter the address and, if appropriate, the name of the person who should receive the mail. If the name of the College or University is not in the list, you’ll be instructed to visit the Federal Government’s FAFSA website to verify that the school is 529 eligible. You’ll need to note the student’s college ID number so the funds can be properly credited to the right account. Note that the student ID is NOT the social security number and you should not enter an SSN. If you have chosen to have the funds sent directly to you and you will send the funds to the college, make sure that when you pay online or send the check you include the student ID if available. That way you ensure that the funds are going into the right account. Be certain that the college and the specific expenses the funds are paying for are 529 eligible. And make certain you or the student retain the 1099-Q that will be sent.

Bonus Tips

• If you start your 529 savings plan before your child or grandchild is born that will give you even more time for the fund to increase.
• Only 529 college savings plans that are owned by the student or the student’s parents are reported as assets on the Free Application for Federal Student Aid (FAFSA). So a 529 plan owned by a grandparent or other third party will not be reported as an asset on the FAFSA. However, qualified distributions from such a 529 plan are treated as untaxed income to the beneficiary on the subsequent year’s FAFSA, potentially having a big impact on eligibility for need-based financial aid.
• Besides expenses for tuition, fees, books, and room and board, that is, the obvious education-related expenses, you can use your 529 to pay for other expenses such as computers and software used by the student.
• While 529 plans are typically thought of as reimbursing students for qualified expenses, parents can be paid back, too.
• Save your receipts. You don’t need to submit your receipts with your tax return but you may need them if you ever get audited. and they are helpful to you when preparing your return.
• If you withdraw money from a 529 you need to spend the distributed money on qualified expenses that year. With a fall semester and a spring semester, a school year spans two calendar years but a tax year occurs only within one calendar year. That mismatch can sometimes cause a tax headache.