529 Plan (Part II) - Off to College? Putting Your 529 Plan to UseSubmitted by Washington Wealth Advisors | Falls Church and Ashburn, VA on May 28th, 2019
By Todd Youngdahl, CFP®
Congratulations! Your baby is graduating from high school and stepping into adulthood. For your family, that may mean off to college!
You have been saving into your 529 Plan for years in preparation for this life chapter, and the time has finally come. So, how do you actually use the 529 Plan that you have so diligently grown? Let's take a look.
What Can 529 Funds Cover?
Technically, the money in your 529 account is yours and can be used however you want. However, if it isn’t used to cover qualified expenses, withdrawals may be subject to a 10% penalty and regular income taxes. So, it is best to use it for qualified expenses – tuition and room & board and textbooks and other learning tools. Let’s take a closer look at each.
Tuition and related fees for a college, university, vocational school, or other postsecondary educational institution are qualified as long as the institution is eligible to participate in a student aid program administered by the U.S. Department of Education. (up to $10,000 a year can also be used for K-12 tuition as a result of the 2017 Tax Cuts & Jobs Act.)
Room and board are qualified expenses as long as they do not exceed the allowance for room and board included in the school’s cost of attendance for federal financial aid calculations or the actual cost if the student is living in school-provided housing. It’s important to note that if your student is living off-campus, their total expenses may not qualify if they exceed the school’s official cost estimate. Also, room and board expenses only qualify if the student is attending school at least half time.
Textbooks are qualified expenses as long as they are required for a course. Computers, software, and related equipment also qualify for tax- and penalty-free 529 withdrawals if they are used primarily by the student while in college.
Almost anything purchased for amusement, entertainment or hobby is not a qualified expense including sports expenses, monthly health club dues, insurance payments, electronics, smartphones, transportation, travel costs, or student loan repayments. If you have a specific question about coverage, check with your school’s financial aid office.
Required Records & Reporting
Because not all expenses qualify, it is important to maintain detailed expense records. Your 529 Plan administrator will report cash flow in and out of the Plan throughout the year, but it is your responsibility to account for qualified expense withdrawals.
You must report the qualified expense withdrawal amount to the IRS every year. Any excess withdrawals will be subject to income tax on the growth and a 10% penalty. The penalty may be waived in the event of the death or disability of the beneficiary or if the student receives a scholarship, VA assistance, or other nontaxable assistance that isn’t a gift or inheritance. In the case that the student receives such aid, an amount equal to the aid may be withdrawn from the 529 Plan without penalty.
How To Withdraw Funds
Because The 529 Plan is a tax benefit, withdrawals and expenses must match within the calendar year, not the academic year. It can take up to a couple of weeks to transfer funds, so plan ahead to make sure all transactions occur in the proper year.
There are several ways to withdraw and use 529 Plan funds. From a record-keeping perspective, the simplest method is to transfer payments directly from your 529 Plan to the educational institution. Fund transfers can take time, so be aware of school payment deadlines to allow for enough time for the transfers to be completed.
Another option is to pay expenses out of pocket and then take withdrawals to reimburse yourself. The major benefit of this is that you will know exactly how much to take since you have already incurred the expenses. However, you’ll need to have enough money outside of your 529 Plan to cover the expenses before you are reimbursed.
Your final option is to take the withdrawal from your 529 Plan first, prior to paying qualified expenses, and deposit it in a bank account for future expenses. You must be careful about tracking your expenses with this method since you are taking withdrawals before you know exact costs. If you’re not careful, you could end up over withdrawing and incurring penalties.
What Happens With Leftover Money?
If you end up with a balance in your 529 Plan account after graduation, there are several options you can take with the funds. First, these funds could be applied to graduate school qualified expenses, and you can continue to save and build the account for future expenses for the same student.
You can roll the funds into another beneficiary’s 529 Plan who is a member of your family. Common choices are to transfer it to a younger sibling or even the children of the original beneficiary. This is a way to set up the next generation of students in your family.
How WWA Can Help
At Washington Wealth Advisors, we can help you navigate both the student aid process and using your 529 Plan. You can have peace of mind knowing that everything is taken care so you can focus on your college student’s experience. Connect with us at 703.584.2700 or firstname.lastname@example.org to schedule a time to meet with us so that we can help you enter this new stage with confidence.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Washington Wealth Advisors, LLC [“Washington Wealth Advisors]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Washington Wealth Advisors. Please remember to contact Washington Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Washington Wealth is neither a law Firm, nor a certified public accounting Firm, and no portion of the commentary content should be construed as legal or accounting advice.
A copy of the Washington Wealth Advisors’ current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.washingtonwealthadv.com.
Please Note: If you are a Washington Wealth Advisors’ client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.