Zina Kumok is a freelance personal finance writer based in Indianapolis. She paid off her own student loans in three years. She also offers one-on-one financial coaching sessions at ConsciousCoins.com.
Zina Kumok ContributorZina Kumok is a freelance personal finance writer based in Indianapolis. She paid off her own student loans in three years. She also offers one-on-one financial coaching sessions at ConsciousCoins.com.
Written By Zina Kumok ContributorZina Kumok is a freelance personal finance writer based in Indianapolis. She paid off her own student loans in three years. She also offers one-on-one financial coaching sessions at ConsciousCoins.com.
Zina Kumok ContributorZina Kumok is a freelance personal finance writer based in Indianapolis. She paid off her own student loans in three years. She also offers one-on-one financial coaching sessions at ConsciousCoins.com.
Contributor Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
Caroline Basile Mortgages and Student Loans Deputy EditorCaroline Basile is Forbes Advisor’s student loans and mortgages deputy editor. With experience in both the mortgage industry and as a journalist, she was previously an editor with HousingWire, where she produced daily news and feature stories. She ho.
| Mortgages and Student Loans Deputy Editor
Published: Sep 28, 2023, 5:00am
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Getty
Opening and contributing to a 529 plan is simple. Once you open the account and choose a beneficiary, you can contribute as much as you want each year until you reach the aggregate limit for the state where the 529 plan is located.
Before you start withdrawing funds and paying for educational expenses, there are important rules you should know.
When withdrawing from a 529 plan, you’ll have to disclose whether you’re using the funds for qualified educational expenses or unqualified expenses.
If you withdraw funds for an unqualified expense, you’ll incur a 10% penalty and then have to report those funds as income on your state and federal taxes.
When you make a withdrawal, you may also have to choose whether you’re using the money for higher education costs, like college or trade school, or if you’re using it for K-12 expenses, like tuition for a private or parochial school.
There is no annual limit on how much you can withdraw for college expenses, but there are limits on certain expenses. An annual withdrawal limit of $10,000 is applied to 529 plans for K-12 tuition expenses. If you’re using 529 plan funds to pay student loan debt, there is a lifetime withdrawal limit of $10,000.
No matter how much you withdraw, you have to use the money for qualified educational expenses to avoid paying income tax and a 10% penalty.
Before withdrawing funds from a 529 plan, it’s important to make sure you’re withdrawing the money at the right time.
“If you are paying for the spring 2022 semester, you can take the distribution in December 2021 if you pay the spring 2022 bill in December 2021,” says financial aid expert Mark Kantrowitz. “Otherwise, you should wait until you pay the bill to take the distribution.”
If you’re concerned about timing your withdrawals, you can wait until the bill is due and make a payment from your checking account or credit card, and then reimburse yourself from the 529 plan. This strategy ensures you don’t miscalculate the timing of the withdrawal or withdraw more than you actually need.
When you want to withdraw money from your 529 plan, there are usually several ways to distribute the funds. You can choose to have the money sent directly to the school, the account owner or the beneficiary.
If you opt to receive the funds personally, 529 plan servicers usually let you choose between having the funds deposited into your bank account or receiving a check, which may take longer.
Once you’ve selected the recipient, finalize the request and wait for the money to go through. When you’re ready to make another withdrawal, repeat the steps listed above.
There are exceptions to the 10% penalty for 529 unqualified withdrawals. If the student receives any kind of tax-free financial aid after initiating the withdrawal, like a scholarship or tax credit, then they won’t owe the 10% penalty. However, they will still have to pay income taxes on the earnings portion of the withdrawal.
If the student dies or becomes disabled, any withdrawals that occur after that event will also not trigger the 10% tax penalty.
When you have 529 plan funds that are distributed to the account owner or the beneficiary instead of directly to the college, it’s crucial to keep a record of how you spend it. You need to be able to prove to the IRS that you used the 529 plan funds for a qualified educational expense to avoid any fees.
Keep those receipts organized. For example, if you have receipts in your email account, use a labeling system and mark any email receipts with a “529” label. If you get a physical receipt, scan and upload it to a cloud-based storage system like Google Drive, Dropbox or Adobe Document Cloud.
Paper receipts can lose their saturation over time, so scanning and capturing them before they degrade in quality is important. Remember, the burden is on you to prove that you spent the money on qualified expenses.
If you have many withdrawals or expenses, you should also keep a spreadsheet listing each expense, what it was for, the cost and when you bought it. If you keep your receipts in a cloud-based storage system, you can link to those documents in the spreadsheet. Storing the spreadsheet in that system as well will help you keep track of everything.
Keeping track of your 529 withdrawals and spending is critical to avoiding a surprise tax bill.
If you accidentally withdraw too much from your 529 plan, you have 60 days to return the excess funds to a 529 account. If you have multiple 529 plans, you are not required to return the money to the same 529. It just has to be a plan for the same beneficiary.
If you miss the 60-day cutoff, then the excess will be treated as an unqualified withdrawal and you’ll owe income taxes and the 10% penalty.
Find the best Student Loan Refinance Lenders for your needs.
