Using your 529 Savings Plan? Withdraw expenses before December 31
The end of another year isn’t just for gift giving and visits with Santa. It’s also the time of year when financial planners recommend families make withdrawals on their 529 Savings Plans. Here is more from our guest blogger, certified financial planner Sean Moore.
We know it’s a busy time of year, but if you’re a college parent who is finally enjoying the rewards of that 529 Savings Plan you’ve been contributing to faithfully for years, we have an important item for your to-do list: Make your withdrawals by December 31.
The rule is pretty basic. If you spent the money in 2018, you need to make the withdrawal in 2018. Obviously, it’s important to know which expenses are eligible and which are not. If you make a withdrawal for a non-qualified expense, the earnings portion of the withdrawal is subject to income tax plus a 10% penalty. However, unlike a retirement savings plan, your contributions into a 529 college savings plan (the amount you originally deposited) will never incur a penalty due to a non-qualified withdrawal.
Eligible expenses include:
– academic fees (such as lab fees)
– required books and supplies
– dorm room and board
– off-campus rent (up to the school’s allowance for room and board)
– technology (such as a new computer, printer, internet service)
– special needs and adaptive equipment
Some expenses that are NOT eligible, even if they’re used for college:
– health insurance
– sports fees
– activity fees
Note that if you’re sent a bill for some of next year’s expenses in advance, you can make the withdrawal from your 529 college plan this year as long as the bill is paid this year It’s always important to hang on to all receipts — not only to jog your memory, but also in case the IRS ever has questions.
You may also want to think strategically about how much of your 529 to withdraw each year. If you plan to claim one of the education tax credits, or if you’re also taking out student loans, you will need to coordinate the distributions to avoid “double-dipping”. A financial planner or accountant would be a great resource to help you make the best choices for you and your student.
The Florida Prepaid College Board does not provide tax or investment advice regarding its Florida Prepaid College Plans or Florida 529 Savings Plan.
Sean Moore is a certified financial planner and president of SMART College Funding based in Boca Raton.