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.


Todd Flynn, CPA, CFP® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other successful and accomplished individuals to help them define their financial goals and implement an ongoing financial planning process.


Just When I Thought Microsoft’s After-Tax 401(K) Benefit Couldn’t Get Any Better

As mentioned in my previous Microsoft articles, “Are you Taking Advantage of this Little Known Microsoft Retirement Plan Benefit?” and “Microsoft’s After-Tax Savings Benefit … Just Got Better”, Microsoft has a great and rarely utilized feature in their 401(k) plans. The benefit allows employees the opportunity to contribute an additional $27,500 (for 2019) of their … Continued

Is Private Banking Right for You and Your Business?

Key Takeaways Large commercial banks bring economies of scale, a commitment to technology, competitive lending rates, and interest-bearing accounts. Commercial banks aren’t always the right option for individuals and businesses with complex financial structures and unique service needs. A private banking relationship at a local or regional bank may help you navigate the complexities of … Continued

Financial Plan = Freedom

In Soundmark Principal Bill Schultheis’ latest column, he reminds readers why it’s imperative to tune out the market noise – especially in our current economic climate. Bill created the tagline “How to Build Wealth, Ignore Wall Street, and Get on with Your Life” with the release of his book, The Coffeehouse Investor. Over 18 years … Continued

What to Do with Your Year-End Bonus

Key Takeaways Whether your bonus is delivered on a consistent schedule or is a pleasant year-end surprise, review your goals carefully before deploying those funds. Additional financial resources can help you accomplish more goals, reach your goals faster, and/or increase your current goals. Disciplined Microsoft employees can utilize a cash flow strategy that maximizes their … Continued

Soundmark Launches New Client Portal

We are proud to announce the launch of our new client portal. Replacing the Vault, the Tamarac client portal provides an enhanced client experience. Some of the new features include: View household accounts and transactions online View and link external accounts including retirement accounts, mortgages, bank accounts, and credit cards Add other assets such as … Continued

Doctors… Please Don’t Make These Mistakes

Do any of these sound familiar? Investing in startups or other long shot endeavors. Not focusing on what you do best. Being inadequately insured.  You are an expert in your field. You went to school for six to ten years longer than most college graduates and it’s paid off. You earn substantially more income than … Continued

Remember the Advantages of Global Diversification

With US stocks outperforming non-US stocks in recent years, some investors have again turned their attention towards the role that global diversification plays in their portfolios. While international and emerging markets stocks have delivered disappointing returns relative to the US over the last few years, it is important to remember that: • Non-US stocks help … Continued

The Best of 2018

What a year we’ve had! We shared a lot of information over the past year but wanted to highlight our most popular blogs. 1. Are You Taking Advantage of this Little-Known Microsoft Retirement Plan Benefit? One of the most generous, but under-utilized retirement benefits is called the “After-Tax Contributions.” Microsoft has added a provision to its … Continued

Market Thoughts

Markets around the globe have experienced sharp sell-offs over the past two months, driven in part by geopolitical tensions, uncertainty over trade tariffs, and in the U.S., a continued tightening by the Federal Reserve. We would like to take this opportunity to share our reflections on the current climate especially as it relates to our … Continued