Back-to-school finances with your 529 Plan

Back-to-school finances with your 529 Plan

Back-to-school time may mean a bunch of new expenses if you are sending your kids to private school or college.  There is tuition, books, school supplies, living expenses and perhaps even travel expenses.  You have saved up funds in a 529 plan now it is time to use your savings.  Distributing funds from the 529 plan for all these varying expenses can be complicated, plus there are rules for accessing the 529 plan.   If you make a mistake you could end up with tax consequences and penalties or get a letter from the IRS asking for documentation.

My son is a Junior at the University of California, Santa Barbara and I am currently using his 529 plan to pay for college expenses.  Both of my boys attended private high school as well and I used the 529 plans to help with tuition.  I will share what works for me as well as other information about using your 529 plan.

Qualified vs. Non-Qualified Expenses

First, know if your distribution is for a qualified or non-qualified expense.  Qualified expenses come out of the 529 plan tax-free, but non-qualified expenses generate taxes and penalties.  Below is a list of some of the major rules to remember and you can check out this resource to identify a qualified vs. non-qualified expense:

• You can use a 529 plan for K-12 tuition only (no books, uniforms, etc.), up to $10,000 per year without taxes and penalties.
• Travel and transportation expenses are not qualified expenses.
• You must match expenses and 529 plan withdrawals in the same calendar year.
• Off-campus housing is a qualified expense but only up to the allowance reported by the college in its “cost of attendance” figures.
• Computer (including speakers, mouse, etc.), software and internet expenses are qualified expenses.

Select Payee When Taking a Distribution

Generally, you can choose to distribute money from the 529 plan to the account owner (usually the parent or grandparent), the beneficiary (the student), or the school (not all 529 plans allow for this).

• I pay myself back for qualified expenses. My son and I set up tuition, room & board (and off-campus rent) to come directly from my checking account and I reimburse myself from the 529 plan.  All other expenses go on a credit card and then I reimburse myself for qualified expenses.
• Set up an ACH transfer from the 529 plan to the account owner and beneficiary bank accounts for quicker transactions.
• If you choose to make distributions for non-qualified expenses the payee will be required to report the distribution for tax purposes. Make sure you decide if it is better for the account owner or beneficiary to pay the taxes and penalty before you choose the payee for a non-qualified expense distribution.

Other Tips

• Keep good documentation of all expenses and store receipts with your tax return files for each year.
• Plan ahead for distribution requests. When you request a distribution from the 529 plan it may require trades to settle which could delay the funds being distributed.
• Coordinate tax credits, scholarships, and other assistance programs with 529 plan distributions.
• Use this opportunity to give your student some financial responsibility. My son oversees making sure that all school expenses are paid, and a receipt is emailed to me.  We also check in monthly to make sure we stay on track and keep each other accountable.
• Check out this video recorded by our CEO, Anna Sergunina, “The Ins and Outs of 529 Plans” you can watch it here.

I would love to hear where your student is going to school!  Please reach out or send me a picture!  We can help you develop a plan to save for education expenses or manage school expenses with your cash flow and savings.  Let’s chat to see how we can help.