How to use your 529 funds for your children’s education

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7 steps to follow

Many of us have been saving and saving to put money aside for college expenses for our children or grandchildren. And now the chickens have come home to roost: your eldest will begin school this fall, leaving you with the dilemma of how, when, and how much to withdraw from your 529 plan.

My wife and I are dealing with this now as our eldest grandson is about to take this giant leap and will enroll this fall. So after thinking about how he got so old so quickly, we and his parents had to start figuring out the best ways to exploit the 529 plan we opened for him when he was born. They and you need to know how to maximize funds, how to comply with tax laws, and how to ensure that these funds do not compromise the 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 education expenses are eligible.

7 steps to using your 529 plan

  1. The obvious first step is to check how much you actually saved. Given recent market volatility, you might be alarmed by the number staring at you from the screen. It is likely that the number has dropped considerably, despite your best efforts to protect the principal.
  2. Assuming there are funds remaining in the account, your next step is to determine what portion of the first year’s costs the full amount will cover. Most colleges require a semester’s worth of payments just before the semester starts – August for a September start and December for a January start. Many colleges also have extended payment plans where you pay monthly and payments begin several months before the semester begins. It’s likely that you’re too late to start a payment plan for enrollment this fall, but you can consider this option for year two.
  3. Next, determine if the student receives financial aid based on their needs. If not, proceeds from the 529 plan will not affect any financial assistance. Note that this may affect eligibility for future years if the funds are paid to the college or to the student, as they may be considered non-taxed income for the student.
  4. If the student is receiving need-based aid (even loans if the loan is a subsidized federal loan), you will need to ensure that the funds you transfer do not affect the student’s scholarship. You or the student can check with the college financial aid office to make sure the product does not affect the financial aid award.
  5. Most 529 plans have an online presence that lets you access your account. From this account you can make your withdrawal. This is often referred to as a “put” option, as the funds are usually tied up in various equity accounts. Under the “sell” menu, you will likely see a list of all of 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 will then be asked to choose whether you want the funds sent to you (as the account owner) or directly to the college. You will get something like this on the screen: Distributions payable to the owner of the 529 will be reported on Form 1099-Q under his social security number. Distributions made to beneficiary 529 or to a qualifying college or university are reported on Form 1099-Q under the beneficiary’s social security number.
  7. If you choose to send the funds directly to the college or university, you will likely be presented with a drop-down menu where you can select the school. You can then enter the address and, if applicable, the name of the person who should receive the mail. If the name of the college or university is not listed, you will be directed to visit the federal government’s FAFSA website to verify that the school is eligible for 529. You will need to note the ID number student’s university so that the funds can be correctly credited to the correct account. Note that the student ID is NOT the social security number and you do not need to enter an SSN. If you have chosen to have the funds sent directly to you and you will be sending the funds to the college, make sure that when you pay online or send the check, you include the student card if available. This way you ensure that the funds are paid into the correct account. Make sure the college and specific expenses the funds pay are 529 eligible. And make sure you or the student keep the 1099-Q that will be sent to you.

bonus tips

  • If you start your 529 savings plan before your child or grandchild is born, this will give you even more time for the fund to grow.
  • Only 529 college savings plans owned by the student or the student’s parents are reported as assets in the Free Application for Federal Student Aid (FAFSA). Thus, a 529 plan held 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 for the beneficiary on the following year’s FAFSA, which potentially has a significant impact on eligibility for need-based financial assistance.
  • Besides tuition, fees, books, room and board, i.e. the obvious education-related expenses, you can use your 529 to pay for other expenses such as computers and the software used by the student.
  • While 529 plans are generally considered to reimburse students for qualifying expenses, parents can also be reimbursed.
  • Keep your receipts. You don’t need to submit your receipts with your tax return, but you may need to if you ever get audited. and they will be useful to you when preparing your return.
  • If you withdraw money from a 529, you must spend the distributed money on qualifying expenses that year. With a fall semester and a spring semester, an academic year spans two calendar years, but a tax year only occurs within a calendar year. This mismatch can sometimes cause a tax headache.
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