Your 529 Plan — what you should know

If you’ve socked away money for college through a 529 plan, congratulations! You’ve accomplished the hardest part. Now you may be near the point where you actually want to use that money. If this is the case, there are a few things you should know. Like —

What you can spend the money on.

When and how you withdraw that money.

What kind of records you need to keep.

1. What qualifies as an acceptable expense?

The purpose of the 529 plan account is to grow savings to cover college costs. Sorry — that late night Sushi run or new itunes download won’t make the cut. If you want to keep the benefits of tax-free growth and tax-free withdrawals (after your initial taxed contribution) you’ve got to reserve your 529 money for what qualifies as a legitimate college expense. It’s important to know just what is deemed an acceptable expense.

According to American Funds, one of the bigger 529 plan administrators, your allowable expenses include —

  • Tuition

  • Mandatory fees (like lab fees)
  • Required textbooks, supplies and equipment
  • Some computer stuff

Computer related items must be used by you, the beneficiary, during the time you are enrolled at an eligible educational institution. Acceptable expenses include computer or peripheral equipment, software or internet access and related services.

  • Room and board

Coverage is limited to academic periods where you are enrolled at least half-time in a degree, certificate or other program that leads to a recognized educational credential awarded by an eligible educational institution.

  • Special needs services

Note: Paying off your student loan is not considered a qualified expense. Sorry again!

2. How and when do you take money out?

  • Either the owner of the account (usually a parent or grandparent) or the beneficiary (the child or student) can call the 529 plan sponsor and ask that a distribution be sent directly to them via check or ACH bank transfer. Alternatively, the withdrawal can be sent directly to the accredited college or university. Whoever receives the money will get a 1099-Q tax form for tax records. If the money goes to the school directly, the beneficiary (not the owner) will receive the tax form.
  • The withdrawal must be taken the same year that payment of the qualified expense occurred, so if you’re hoping to get 529 account money to cover expenses from 2016, you’re out of luck. Be sure to take withdrawals before December 31, 2017 if you have qualified expenses this year.
  • Here’s an important piece of information. If you use your withdrawal for a non-qualified expense, the withdrawal is subject to income tax on the earnings portion (you can’t select tax treatment on 529 plan withdrawals as they are pro rata), as well as a 10% penalty. Ouch.

3. If you take a withdrawal, what do you need to report?

Once you take money from your 529 account, you should receive a 1099-Q form for the tax year in which the money was taken. Fill it out and send it in. As long as the expenses paid qualify as legitimate expenses, they will not need to be reported on a 1040 tax form.

We recommend keeping detailed records of expenses paid from your 529 account — a necessity should the IRS come calling. A simple spreadsheet, tracking all college costs by student, by year, would work nicely. Let us know if you would like a spreadsheet template. We have one handy.

Other 529 plan facts

  • 529 savings accounts can now be rebalanced twice during a calendar year.
  • You can change 529 plan beneficiaries as often as you like (though some custodians may have their own limitations).
  • Plans can only have one beneficiary at a time. Qualified individuals include spouses, parents, siblings, children, grandchildren, nephews, nieces, and more!
  • You can own multiple 529 plan accounts. You can also be a beneficiary of multiple 529 plan accounts.

If you’d like more information on 529 plan basics, click here.

Also, for information regarding the Washington State GET program, see our previous blog post.

Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.

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