529 College Savings Plan Rules and Reminders

Key Takeaways:

• Distributions from a 529 plan are tax-free if they are used for qualified college expenses such as tuition, room and board, books and computers.
• Distributions from your 529 plan must be made in the same year as your qualified expenses are incurred for your distribution to be considered tax-free.
• Review your 529 plan account investment allocations to make sure the portfolio risk is appropriate as your children approach college-age and you begin taking distributions.

Universities around the country are busy sending admission letters to high school seniors during this time of year. Your own family may have a student receiving one of these acceptance letters.

After the celebratory moments, graduation, and the parties that follow, your family will receive the inevitable financial bills that come with higher education. It’s always an eye opener when you see just how much college tuition, room and board, books, and the other essentials cost.

For those of you who have diligently saved for your child’s education through a 529 college savings plan, you’ve been very wise. We want to remind you about a few important 529 plan rules before you tap into the money you’ve worked so hard to save in a tax-free manner.

Distributions from a 529 plan are considered tax-free only if they are used for the following expenses:

• Payment for tuition and fees.
• Payment for room and board. If your child is living off campus, you can still take distributions for room and board if costs don’t exceed the schools estimated cost for room and board.
• Payment for books and supplies.
• Payment for school-related special services.
• Purchase of a computer, if it is primarily used by the student while attending college.

However, keep in mind the following limitations on your distributions:

• You cannot take distributions for expenses that are already covered by tax-free education assistance such as scholarships, tuition discounts, Pell Grants, and other related reimbursements.
• You must reduce the reimbursements by any costs used to claim an American Opportunity Tax Credit or Lifetime Learning Credit.
• Your distributions must be taken in the same year as your child’s education costs are incurred. A distribution made in the following year would be considered a taxable distribution.

• You cannot take distributions for transportation costs to and from school or for insurance, sports or club activity fees, and many other types of fees that may be charged to your students but are not required as a condition of enrollment.

Document and Keep Track of Records

When taking distributions from a 529 plan, keep copies of your tuition bills and expense receipts in case you are ever asked for verification by the IRS. This is something I have personally dealt with since both of my children started college – like many others, they don’t report all their reimbursable expenses.

Also, you have the choice of either paying the college directly from your 529 plan or reimbursing yourself for the expenses. It is completely up to you which option you choose and really based on which option is most convenient.

529 Plan Investment Allocations

Finally, review your 529 account investment allocation to make sure the risk tolerance and growth goals are appropriate for your child’s age (i.e. nearness to your planned drawdown period). Many plans have age-based allocations that progressively reduce the risk of the portfolio over time, but it’s important to do your own allocation review to ensure that the funds you have worked so hard to save, are well-protected as you begin the distribution process.

Your Investment Matters

It has long been said that a college education is an investment in a child’s future. But with tuition rising at three times the rate of inflation and four-years of attendance at many selective schools approaching $250,000, it’s an investment in your own financial and personal wealth future as well. Contact me if you or someone close to you has questions about establishing, growing, or drawing down college savings plans.

This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Soundmark Wealth Management, LLC, its advisors and its affiliates do not provide tax or accounting services. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or accounting advice. Please consult with your tax advisor prior to engaging in any transaction.