Here are some things to know about each of these methods: There are three choices when withdrawing funds from your 529 plan: a direct payment from the 529 plan to the school, a check made payable to the account owner, or a check made payable to the student. You should prepare your strategy ahead of time with your accountant and settle on the approach that gives you the biggest tax break. If your 529 withdrawals exceed your adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable. Expenses that are claimed as tax deductions for college tuition and fees.Expenses used to claim the American Opportunity or Lifetime Learning tax credit.Any other tax-free payments (but not gifts or inheritances) received as educational assistance.Employer-provided educational assistance.Tax-free scholarship and fellowship grants.It’s best to consult with your tax advisor and your financial advisor before taking your 529 withdrawals. If making use of your 529 plan seems complicated, that’s because it is. Account statements that show tuition payments.You should maintain these records in a secure or backed-up area for seven years. This is why it’s important to keep good records (receipts and supporting documentation) that reconcile the total withdrawals that the 1099-Q reports to the IRS with the total that was spent on qualified educational expenses. What isn’t included on Form 1099-Q are the details about how the money was spent. In each year you take withdrawals from a 529, the plan administrator should issue a Form 1099-Q, which reports the total distribution taken from the account in a given year, the portion of the distribution that came from earnings in the account, and the portion of the distribution that represents the original contribution to the account. Your 529 plan administrator keeps track of your contributions and withdrawals. Lifestyle and personal expenses 529 recordkeeping.Club and activity fees, including fraternity & sorority dues.Insurance (including health insurance), even if offered by the school.Transportation costs, including those for study abroad.Technology: computers, computer equipment, software that is required for coursework.Books & supplies that are required for coursework.Off-campus food and routine utility bills count under room and board as qualified expenses, but again, you must not exceed the allowances determined by the school. Your 529 account earnings are tax-free, as long as the plan withdrawals are used for qualified higher education expenses in the calendar year (not school year) they’re withdrawn, and as long as the beneficiary is enrolled as at least a part-time student at an accredited institution.Īs far as which expenses are qualified, the list is not long:Įxpenses for housing not owned or operated by the school is qualified as long as they don’t exceed the school’s estimates for on-campus room & board. To make the most of that tax favorability, it’s important to understand some basics about the strict 529 withdrawal rules. The thing we all love about 529 plans is their tax favorability for college savings. Be sure to check with your accountant and financial advisor whenever you have questions about your 529 spending. Knowing which expenses are qualified is essential 529 knowledge.
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