529 Withdrawal Guidelines
Key facts
- 529 withdrawals may be used for qualified education expenses, such as tuition, room and board, mandatory fees, required books and supplies, and computer equipment at eligible educational institutions.
- Distributions that are not used for qualified education expenses at eligible institutions may be subject to taxes and a 10% tax penalty.
Setting money aside for college expenses via a 529 plan is a massive undertaking, but it is well worth the effort once those college bills start coming in. Make sure you get the full benefits of your tax-advantaged plan by following these 529 withdrawal requirements.
529 Withdrawal Rules
The beauty of a 529 plan is that it was designed with flexibility in mind. You can typically invest in any state’s 529 program, regardless of where you live. Beneficiaries can attend any eligible college or university, regardless of which state administers your 529 account.
However, in order to protect the tax-advantaged status of your investment, funds must be used for qualified expenses, which include the following:
- Tuition: It goes without saying that tuition is a top college expense, and one of the most popular uses of 529 funds.
- Room and Board: The cost for room and board typically qualifies for 529 funding, as long as the student is enrolled at least half-time. Under certain circumstances, off-campus housing costs may also be eligible for payment from your 529 plan.
- Required Books and Supplies: Believe it or not, the cost of books has increased even more quickly than the cost of tuition. One study puts the total bill for required books and supplies at $1,200 per year, making 529 plans an important part of the payment strategy.
- Computers and Related Equipment: 529 plan regulations were adjusted to include computers and related equipment on the list of qualified 529 plan expenses. This is a relief to cash-strapped students, since it is nearly impossible to function without a computer at today’s technology-driven colleges and universities.
Note that transportation costs, fees not required as a condition of attendance, and repayment of student loans are not eligible expenses for 529 plan purposes.
529 Distribution Pitfalls to Avoid
As expenses come up, it is best to withdraw from your 529 plan right away, because distributions should be taken in the year expenses are paid. Bear in mind that withdrawing funds for unqualified expenses will subject you to federal tax liability on earnings, potential state tax liability, and in some cases, a 10% tax penalty.
If your beneficiary gets a scholarship or you have funds left over in your 529 plan, there is a solution. Avoid the tax ramifications of an unqualified withdrawal by changing the beneficiary on your account.
There is no time limit imposed on your 529 account, so funds can stay in the plan indefinitely. Paired with the option to change the plan’s beneficiary, the account can support education expenses for generations of family members.
Disclosure
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.
Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.