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Maximizing Your 529 Plan for Higher Education Thumbnail

Maximizing Your 529 Plan for Higher Education

As students return to college, higher education is always a topic of conversation this time of year. Specifically, how to finance tuition, room and board, books, and other essentials. To keep you on track and to ensure you don’t run afoul of IRS rules surrounding distributions, here are some things to keep in mind.

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 school’s 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 programs 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/from school or insurance, sports, or club activity fees.
  • Additional fees that may be charged to your student 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 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 both your child’s age and the time-horizon for the planned drawdown. Many plans have age-based allocations that reduce the risk of the portfolio as your child ages. But it’s important to do your own review to ensure the funds you worked so hard to save are preserved and available when you need them. 

Let Soundmark 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.


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.
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