It’s time! Using your 529 education savings plan account
You may not feel emotionally ready for your child to leave the nest, but you’re better prepared financially, thanks to your 529 savings plan. You’ve been smart about saving; now be smart about how you spend that money.
Key takeaways
- Know the rules for 529 savings plan withdrawals.
- Think about how and when you’ll access the money.
- Avoid withdrawals for nonqualified expenses.
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How to be smart about spending what you’ve saved
The rules for 529 savings plan withdrawals are easy to navigate with a little preparation. Know the basics to ensure a smooth path for you (the account owner) and your child (the beneficiary).
Keep the tax benefits going
The earnings from your 529 savings plan aren’t subject to federal tax. Not when they’re in the account and not when you withdraw them either, as long as you use them for qualified education expenses. In addition, depending on your state’s rules, you may be able to deduct some or all of your contributions. These tax advantages apply to qualified education expenses. State tax treatment varies.
If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.
Withdraw funds in three steps
What to do with leftover funds
What if you don’t need all that money for school after all? If your child received a scholarship, you can still access the money up to the amount of the scholarship free of penalty. But you will have to pay taxes on the earnings. Or perhaps your child is attending a more affordable school, or room and board expenses are less than expected.
Before taking withdrawals for anything besides education, consider other options. Is your child planning on grad school? Your account can continue to grow and be used for those costs. If the child’s expenses are covered, the funds can be transferred to a 529 savings plan for a different beneficiary. You’re even allowed to withdraw money for a younger beneficiary’s eligible K-12 related expenses. However, the earnings may not be exempt from state taxes, so talk to a financial professional before making your decision.
You can use any 529 assets to pay off qualified student loans, both principal and interest, with up to a $10,000 lifetime maximum. Not only can you pay the loans for the beneficiary, but you can use the funds toward the student loans of the beneficiary’s sibling too. And remember, you can designate yourself as the beneficiary.
Unused funds held in a 529 account can be rolled over to a Roth IRA (individual retirement account) for the beneficiary if the account meets certain requirements. Penalty-free rollovers can be made if the account has been open for more than 15 years, and the amount to be rolled over must have been in the account for a minimum of five years. This rollover allowance has a $35,000 lifetime cap per beneficiary.
Things to do next
- Contact your 529 savings plan provider to understand the process of making a withdrawal.
- Mark your calendar or set up an alert on your phone for the dates you’ll need to start the transaction process. Make sure you leave plenty of time for the payment process.
- Consult your tax professional about who should be the direct recipient of the money: you, your child or the school.
