Sending a child to college can be an emotional and stressful time. Having money saved in a 529 plan can make things a lot easier. That said, transitioning from saving for college to paying for college is a significant shift. Here are some things to consider when spending a 529 plan.
– Know which expenses qualify: 529 plans allow tax-free withdrawals for qualified expenses. The good news is that the list is broad, but it’s not all-encompassing. Here are a few of the major expenses that apply.
• Tuition: This includes colleges, universities, vocational schools, or any institution eligible to participate in a student aid program administered by the US Department of Education. K-12 tuition (up to $10,000 per year) would also qualify in some states.
• Room and Board: Both on and off campus.
• Technology Equipment: Computers, laptops, software, etc.
• Books and supplies
Notable expenses that are not qualified include travel, transportation, and cell phone plans.
– Know the different ways to pay: The first way is to pay the school directly from the 529 plan. This method allows for very efficient recordkeeping, but you’ll want to check the tuition due date and the processing time of your 529 plan administrator ahead of time to avoid any late payments. The second way is to move the funds from your 529 into a bank or brokerage account and then make the payments. This option is flexible, so it can be suitable for expenses like books or off-campus room and board, but all the recordkeeping is up to you.
– Document everything: You are responsible for reporting everything to the IRS. In order for your withdrawals to be tax-free, they must be equal to or less than your qualified higher education expenses (QHEEs). To show this is the case, keeping all of your receipts is a good idea. You’ll be glad you did in the event of an audit.
– Know the options for any leftover funds: There are many options for any excess money in a 529 plan. Here are a few. First, you can transfer the funds to another qualifying family member (such as a sibling) tax-free. Second, the funds can also be used for graduate school, so if your child is considering continuing their education, you can leave the funds in the 529 and use them later. Third, starting in 2024 you can roll up to $35,000 from a 529 into a Roth IRA for the beneficiary (so long as the 529 is at least 15 years old). This great option can really jumpstart a child’s savings and set them up for retirement success.