As students head back to college, higher education is always a topic of conversation this time of year. Specifically, the topic centers around the cost of higher education and how to finance tuition, room and board, books, and the other essential costs. We’ve published much about this subject and wanted to remind you about a few 529 college savings plans details.
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 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.
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. Remind your students to keep their records as well, they often 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.
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.
Let Us Help
If you have any questions about establishing, growing, or drawing down college savings plans, please contact our office. Let us help you navigate the costly road to higher education.