If you'll soon be facing those long-anticipated education expenses, don't worry. Taking money out of your 529 plan account won't be difficult. Simply follow these steps.
To process a request online, log on to your account, choose Go to my 529 plan account, and then select Withdrawal. Or you can mail us a a completed Withdrawal Request Form.
However, before you request that withdrawal—here are some tips to help you avoid some common mistakes.
Withdraw only for qualified expenses
Any earnings you withdraw are free from federal income taxes and the 10% penalty only if the money is used for "qualified" education-related expenses.
Qualified expenses include: tuition, fees, books, equipment (such as computers, internet access, and computer software), certain room and board expenses, and expenses for students with special needs. You can also use up to $10,000 annually for tuition at qualifying K‒12 public, private, and religious schools; however, not all states allow for tax-free withdrawals on the state level. Be sure to check with your home state rules.
Nonqualified expenses include: student loan payments, travel costs, sorority and fraternity fees, and sports or entertainment expenses.
For more information, refer to IRS Publication 970, Tax Benefits for Education.
Take out the right amount
While this may seem obvious, it's important because if you withdraw more than you need, that excess must be reported as taxable income by either you or the beneficiary. When you're calculating your withdrawal amount, don't forget to:
- Subtract any scholarship or grant money from the amount you're planning to withdraw.
- Deduct any federal tax credits, like the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit.
Map out a withdrawal plan
Think about spreading out your withdrawals. If you do so over the 4 years of college, you'll be less likely to withdraw more than your yearly qualified expenses.
And, if you can, keep making contributions. Even if the money won't be in the account a long time, you'll pay less income tax. You also won't miss out if your state offers a tax deduction or credit.
Don't wait too long
Remember that electronic bank transfers from your 529 plan typically take 3‒5 business days, so make your withdrawal request in time for you to meet your payment deadline. If you want to receive a check, allow at least 10 business days. Keep in mind, if you have not added banking instructions to your account, give yourself additional time for your bank information to be verified.
Another consideration is to pay the bill when you receive it, and ask for your 529 withdrawal be sent to you. As long as you keep the documentation needed for IRS purposes, this can help reduce the anxiety of tight timelines.
Ready to request a withdrawal?
Refer to these instructions which explain how to do so online, by phone, or by form.
A note about IRS Form 1099-Q. A 529 plan withdrawal that is sent to the school (college or K-12) will result in an IRS Form 1099-Q Payments From Qualified Education Programs being sent to the beneficiary. This will happen even if the beneficiary is under age 18 and has no taxable income. Nontaxable 529 plan distributions, however, are not required to be reported on an income tax return.