Taking Money Out of Your 529 Plan? Know These Tax Rules

If you have children, you may be familiar with the 529 savings plan.
 
This is how it works in a nutshell.

• You pick a plan (sponsored by states)
• You contribute money
• You invest the money 
• Your money grows tax-free
• You use the money to pay for qualified higher education expenses
• You don’t pay income on distributions if the money is spent on qualified higher education expenses

WITHDRAWING YOUR MONEY

The idea is simple enough. But we get calls from some of you from time to time with this question:
 
“How exactly do I withdraw money from my 529 plan?”
 
Each state has its own 529 plan. Some have more than one plan. And the actual process might differ slightly from plan to plan.
 
That being said, you can typically do this in one of two ways:

• Have the 529 plan send a payment directly to the institution, or
• You pay tuitions and fees and reimburse yourself from the 529 plan.

 
We usually recommend the second option of reimbursing yourself. This way, you get to control every transaction with a clear audit trail, and with saved invoices and payment receipts.
 
Just make sure the amount of reimbursement matches up with actual expenses shown on statement, invoice and receipts.
 
And save everything, so in case you are audited, you can provide documentation.
 
QUALIFIED HIGHER EDUCATION EXPENSE

Speaking of documentation, in order for your withdrawals to be tax-free, the money must be:

• Used for qualified higher education expenses,
• Paid to an eligible educational institution, and
• Withdrawn in the same time period in which the expenses were incurred.

 
Qualified higher education expenses generally include:

• Tuition and fees,
• Books, supplies, and equipment required for enrollment or attendance,
• Room and board for students who are enrolled at least half-time, and
• Expenses for special-needs services in the case of a special-needs beneficiary that are incurred in connection with such enrollment or attendance.

 
In general, any accredited public or private college, university, or technical school in the United States or abroad that participates in federal financial aid programs should be eligible educational institutions. 

We do not provide legal or tax advice. Readers should consult their own legal or tax advisor. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Investors should talk to their financial advisor prior to making any investment decision. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.