With back-to-school expenses, August is a generally expensive and financially stressful month for most parents. When the kids get to college age, however, August becomes a crazy expensive month as tuition, dorm and meal fees come due. I’ve got it set up now that when Purdue, and now IU as well, want money, the bursar's office blows up my phone with texts and my inbox with emails letting me know the bill is coming. Which causes me to run to the 529 accounts for cash.
It's human nature, but after any of us have done something for a long while, we take the nuances of the activity for granted. A couple weeks ago, when I wrote about how to actually pay the bills when college time is here, one of the casual mentions was using funds accumulated in a college savings account, or 529 plan, to pay for college.
Well, this column generated a ton of new questions from readers and clients alike, about how to complete the transaction of “using the 529 plan” to pay the bills, so I thought I would revisit the topic with some granular detail.
For families of college students that have used a 529 plan to save for college, it is now game time. While taking money out of the college savings account is easy, I will discuss the process in the context of the Indiana College Choice plan, which should use a process that is similar to the plan in most other states.
529 plan funds can be used for educational institutions that are in any state — not just the state offering the plan — are accredited, offer associates, bachelors, graduate or professional degrees, are public or private and are eligible to participate in student financial aid programs of the U.S. Department of Education. One question sure to result from these criteria is, does this include trade or vocational schools? The answer is for many “yes,” but it's important to check with the school’s admission office to make sure.
In order to enjoy the full tax benefit of potentially tax-free growth from the 529 plan, the funds withdrawn must be used for qualified expenses. Qualified expenses specifically include tuition, room and board (off or on campus), books, supplies and computers. Expenses not qualified under the 529 rules are transportation, cellphones, social dues, entertainment, travel or furniture.
A withdrawal can be requested online, over the phone or by form sent to the 529 plan provider or your financial adviser’s office if you have an authorized adviser on the account. When requesting the withdrawal, the 529 plan provider will ask if the withdrawal is qualified or not, if following the above guidelines, the answer to this question is yes. The owner does not need to provide proof of qualification to the 529 plan provider, but if records are assembled it’s a good idea to keep them in the ole' tax file just in case.
The withdrawal request can direct the 529 plan provider to send the funds directly to the institution, to the owner of the account by direct deposit or by check. There is no difference in the tax treatment of the withdrawal based on the withdrawal method, only by whether the withdrawal is declared qualified or not.
I personally have the withdrawals sent to my checking account (the same one that has been making deposits), and then I pay the bills from my checking account. Depending on the maturity and responsibility level of the student I either pay the bills directly (for my freshman son), or simply transfer the money to my kids to pay their own expenses (for my older daughters).
I have always found this process easy and stress free. Because none of my kids have been fully funded on the onset of college, I continue to save into my 529 plans when the student is in college in order to continue capturing Indiana’s tax credit for contributions. One more tip typically impacting the spring semester more than the fall, is to make sure the 529 plan withdrawal is taken in the same calendar year as the expenses are incurred, as this does matter in the process.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
