How to Withdraw Funds From a 529 Plan

Posted by Anonymous , 9/4/2007 Tags:WithdrawFundsFrom529Plan
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How to Withdraw Funds From a 529 Plan

Introduction

The 529 college savings plan has withdrawal benefits contingent upon schooling. If money is withdrawn for direct educational expenses, including tuition, books and room and board, then funds may be withdrawn at full value, incurring no taxes. If unforeseen emergencies arise or the beneficiary decides not to pursue college-level studies, then funds may be transferred or withdrawn, minus a penalty fee. Either way, the account holder maintains control.

Instructions

Difficulty: Moderately Easy

Steps

1

Step One

Follow individual plan instructions for making withdrawals for college expenses. Some states may require funds be distributed directly to an educational institution. Other plans may make disbursements or reimbursements directly to the account holder.
2

Step Two

Maximize your tax-free earnings by withdrawing 529 money as needed, rather than in a lump sum. Check with your individual plan rules.
3

Step Three

Time your withdrawals so that they occur without negative impact on your child's financial aid case. When you receive the money may also affect your eligibility for educational tax credits. Consult a financial aid or tax specialist first.
4

Step Four

Make sure the expenses you're contemplating are eligible for 529 funds. The school must be accredited and expenses accounted for. Find guidelines by individual state plans at Saving for College online (see Resources below).
5

Step Five

Withdraw funds for noneducational purposes according to your particular 529 account. Unless the beneficiary has died or no longer needs the money due to scholarships, you will pay a 10 percent penalty on earnings plus tax at your rate of income.
6

Step Six

Time your withdrawal, if possible, for the best effect on your overall tax or loan status. While it might be great to have a quick influx of cash, you might also see a financial backlash. Discuss this important move with your tax consultant.

Tips & Warnings

  • The ability to withdraw allowable funds for educational and ancillary purposes without paying tax at any time makes the 529 plan easiest on those with high tax liability.
  • Avoid closing your account and paying a penalty by transferring beneficiary status to another family member who qualifies.
  • While anyone can contribute to another beneficiary's 529 plan, only the account holder or beneficiary can withdraw funds.
  • Penalties are stiff, so don't make a hasty decision to close your 529 account. If the beneficiary is unsure about college, you can always wait and see. There is no penalty for holding onto the account for a few years.
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