Knowing when and even how to make a 529 Plan withdrawals can be confusing.  My children have completed twenty-eight of thirty-two college semesters.  Yes, I am counting.  Learning about 529 Plans has been educational.  The purpose of a 529 Plan is to incent saving for college costs by providing a tax-free shelter of the money.  Details can be found in The Money Skinny™ article What is a 529 College Savings Plan?.  Let’s focus on rules and guidelines for making 529 Plan withdrawals.

Expense Year Must Match Withdrawal Year

When you pay college-related expenses, you must make 529 Plan withdrawals in the same year.  The calendar year issue gets sticky during winter semester, which begins after January 1^st.  Some schools have a tuition payment deadline in December for winter semester.  Other schools have a January winter semester payment deadline.  Make 529 Plan withdrawals in the same calendar year the expenses are paid.  Forgot about books purchased last spring?  You have until the end of that same calendar year to make 529 Plan withdrawals.

529 Plan Withdrawals

As the account owner, you can pay the college expenses and be reimbursed by the 529 Plan.  Accumulate expenses per semester per child.  Then withdraw a lump sum from the 529 Plan to reimburse yourself in the same calendar year.    Another option is to split the payment between the school and the account owner.  Pay the school directly from the 529 Plan for tuition.  Then reimburse yourself with a second 529 Plan withdrawal for textbooks and other school related expenses.

When Grandma Pays

A situation where it may make sense to have 529 money sent directly to a school is if it involves a grandparent or other family member.  Especially when the 529 money is used for tuition only.  It simplifies the recordkeeping.  Why pass the funds through the co-ed or other third party if direct payment from grandma to the school is easier?  That translates into Junior getting a 1099Q tax form at the end of the year instead of grandma.

Use 529 Plan Withdrawals First

You’ve saved money in a 529 account for some of your child’s education.  You pay the first year out-of-pocket using current earnings.  You intend to use the 529 money in the remaining years.  In a word – don’t.  Use 529 money first.  Realize that tax-free gain as soon as is practical.  What if Junior drops out or plans change?  You could transfer the account balance to an immediate family member.  Best to not risk incurring a penalty for an unqualified withdrawal by using 529 money as soon as college expenses start.

Organizing 529 Account Paperwork

I have a folder in my email account for each of my children for electronic receipts.  I also keep school expense information in a binder and document each 529 Plan withdrawal.  529 Plan withdrawals generate a 1099-Q tax form.  File the Q with other supporting tax documents.  Tax benefits for education are detailed in IRS Publication 970.

Note:  These recommendations are for investment type 529 College Savings Plans.  Pre-paid tuition type of 529 Plans are not included in this analysis.

• When you pay a college-related expense, you must make the 529 Plan withdrawal in the same year.
• You decide who gets paid and when.
• Use 529 money first.