My oldest is on track to start his freshman year of college this fall. We have a 529 plan that has some money in it, and we’re looking to tap that plan to cover the qualified costs. Is there a free “how to” guide that helps us understand things like:
Thanks in advance for pointing me in the right direction.
Regards,
-Chuck
Home Fool
Saving for College has information on which expenses will be qualified. I would expect you can find it on irs.gov as well, but probably not as well explained.
For tracking and documenting - I think same as any other IRS documentation - keep the receipts organized and make a list of everything for the year so it’s easy to fill out the tax forms. And file it away with the rest of the documentation for your taxes so if you’re ever audited you have it.
For the mechanics - check with your 529 plan financial institution. They can tell you what paperwork you need to send them for them to send you a check. (and/or the paperwork for them to send the college a check if you’re wanting to have them send the check directly to the college)
Have you contacted the 529 plan company? I would start there.
For my state, you can withdraw money over the phone or via their website and it can be sent to the student, the institution, or the account owner.
You make it a qualified distribution by “deeming” it so when you request the withdrawal. It would only ever be an issue if you were ever audited (so keep your records but nothing needs be submitted to anyone in advance).
Too bad you can’t see old posts. The IRS has the list of qualified expenses & they can change so check there. Don’t depend on the documentation you receive about the withdrawals - keep your own records of when and what. BEFORE you use the 529 money, review the IRA information on higher education deductions and credits to make the best use of those. Check the payment schedule for the college - they can vary greatly and in particular about in which year a spring semester payment will fall. Be even more careful the last spring - will you child be a dependent for that tax year or not ? Seems simple but in my case, for one of mine, it was not and she was not.
Usually the 529 company will either cut the check to the college or to you(the owner?). This one should be the least of your concerns.
Are you implying that dependency has a bearing on the qualified status of distributions?
No. I implied nothing. I am NOW saying that using money from a 529 involves many moving parts and that the OP should be aware of all of them. One of these things may include prepaying for the final spring before the end of the previous calendar(tax) year.
This is a much more complicated process than taking money from a 529 and I wanted to raise awareness. And I haven’t even raised any other issues concerning scholarships and/or financial aid.
I am doing this now, with kid 1.0.
This is what I’m doing for kid 1.0’s 529. She’s in college presently.
The procedure for your provider will likely rhyme wit this. Decide if you want the money sent to you, or direct to the school, and go from there.
The IRS defines qualified expenses here. Summary is that tuition, books, required fees, etc. are qualified. Room and board are not.
EDIT: the above information is wrong. Updated information from the Tax Strategies board here:
Just in case someone else comes through here later and reads this thread.
You should receive a 1098-T form from every institution where you paid tuition. This would document that qualified expenses occurred. This is used in preparing your income tax return.
Regards,
– HCF
Thanks. The “room and board” line item is an interesting one and a key reason why I posted here instead of just Googling the question.
According to that provided IRS link, it looks like room and board is not qualified. Yet according to other highly-search-engine-ranked sources, it looks like room and board is qualified if the student is enrolled at least half time and the claimed costs do not exceed on-campus costs.
For example, here’s a link from the Ohio 529 plan: Fact: 529 Plans Cover Required College Costs . It indicates room and board is qualified for 529 purposes.
Glad I started digging into this before pulling money out of the account and potentially facing massive taxes and penalties.
Regards,
-Chuck
Home Fool
And here’s an IRS link that seems to indicate that room and board can be qualified: https://www.irs.gov/pub/irs-drop/n-18-58.pdf
“QHEEs also include reasonable costs for room and board for eligible students as defined in § 25A(b)(3) (generally, those who are enrolled at least half-time).”
Grrrrrrrr……
Regards,
-Chuck
Home Fool
Thanks. The “room and board” line item is an interesting one and a key reason why I posted here instead of just Googling the question.
In our case it didn’t matter. We under-saved for college assuming we’d borrow or just find the rest. Our 529 distributions do not cover tuition entirely, so it’s not a problem for us.
I prefer to go straight to irs.gov for questions about whether something is deductible. It’s possible it’s deductible on Ohio state income tax, but not federal tax.
Glad I could help.
Regards,
– HCF
It is unlikely that our 529 balances will fully cover our kids’ costs, but one of the most frustrating parts of this entire process is that even with admission offer letters in hand and FAFSA completed, I still can’t tell you how much the actual price tag will be at any of the schools our oldest is considering. I can’t even get a decent ballpark estimate, not even from the schools that both admitted him and offered him a scholarship… The scholarship letters tell us how large the scholarship is, but not what the original price tag is that the scholarship would be deducted from.
This process stinks.
Regards,
-Chuck
Home Fool
Related to the last complaint:
This might be one of the few bipartisan fixes over the next two years.
Just so everyone on this thread is clear: You need to understand what the IRS citation you are looking at is referring to. Room and board ARE qualified expenses for withdrawals from 529 plans. That’s why the citation that you found that says they are qualified is titled Guidance on Recontributions, Rollovers and Qualified Higher Education Expenses under Section 529 (my bolding).
Additionally, I would point out that off campus room and board are considered qualified expenses for 529 withdrawals, up to the amount set by the college for the “Room and Board Allowance” as a part of the Cost of Attendance, as long as you have documentation for the expenses.
The citation that was cited earlier: Qualified Ed Expenses | Internal Revenue Service (irs.gov) is under the “Credit and Deductions” section of the IRS website. It’s referring specifically to the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), where room and board are NOT qualified educational expenses. The title of the section that talks about qualified expenses is entitled Qualified Education Expenses for Education Credits (again, my bolding).
Credits are more valuable than tax-free withdrawals are, since credits directly offset your tax liability on a dollar for dollar basis, while tax-free withdrawals only save your marginal bracket on the withdrawal amount. Apparently, Congress doesn’t think that room and board should directly offset your tax liability, just things like tuition and books. On the other hand, Congress is apparently willing to give you a tax savings on the amount you withdraw from qualified plans for room and board, in addition to the tuition and books. I would also note that you can’t double dip by taking a 529 withdrawal and claiming those same expenses for the AOTC or LLC. So if you are eligible for the credits, then you should use the tuition and book expenses for the credits, and then use the 529 withdrawals for room and board expenses.
AJ
Name the colleges, whether in or out of state, and his proposed major. Someone might be able to help you out 
Thanks! At least one of the schools (Ohio Northern) has now published its 2023/2024 cost estimates online. So there’s hope.
Regards,
-Chuck
Home Fool
And even more of the schools have now posted their 2023/2024 estimates online. Must be the time of year…
Regards,
-Chuck
Home Fool