Questions about using the college 529 plan?

Factual Questions
1

We’ve set aside money for the grandkids in some 529 plans. Once the kids are actually in college, how does the money get disbursed? The rules say it has to be used for educational expenses. So if the kid needs to buy books, do they have to know the exact cost ahead of time and get funds sent to them or the bookstore?

Looking for some input from those of you who’ve “been there, done that”, not a reference to the IRS regs. Thanks in advance!

2

With books, we have gotten reimbursed. With tuition, we have the money sent straight from the 529 to the college (in our case, it’s NY state). If they need a computer for college, that now counts as an educational expense as well.

3

Same. And when I paid tuition myself, I was able to get reimbursement as well. I was surprised how smoothly the process went.

4

There’s basically two ways to get money out of the 529:

  • Do a disbursement directly to the college for major expenses like tuition
  • Take a withdrawal to be used for education expenses or reimburse the student for education expenses.

There’s no up-front qualifications to withdraw the money. The 529 plan doesn’t care if you transfer the money to your checking account or to the school. The checking for educational use would be done by the IRS if you ever got audited. Money sent straight to the school would typically not be an issue. The thing to be concerned about are cash withdrawals. In that case, you’d want to be able to produce receipts that show that the $$$ you took out for books is matched by the bookstore receipt for $$$. I would guess the IRS isn’t going to care about a $300 cash withdrawal, but they likely will wonder about $30,000 going to your checking account. The simplest thing would be to do transfers from the 529 to the school for major expenses. Then you don’t have to worry about saving receipts since the transaction shows it went to the school.

If you don’t have the option of sending money straight to the school, you can deposit the money into your checking account and then send the money to the school. Then your bank statement will show the money going from the 529 to your checking account to the school.

5

I was surprised when I started taking out of the 529 account for my kids a few years ago, that there is nothing to report on your income tax return. You get a form (a 1099-Q) from the institution that holds the account showing how much they sent you, but there’s nothing on the tax forms to enter that in. You just need to have documentation in case of an audit.

6

For the big items (tuition), if you can’t pay directly, make the withdrawal to your checking account, then write the check.

For smaller items (rent, books, etc.) if you can pay out of pocket, then just add up the amounts and make a withdrawal for the total before the end of the year.

You do need 1099-Qs if you are doing any of the educational credit things on your taxes. (American Opportunity, Lifetime Learning) because you can’t use 529 dollars for those credits. it’s complicated.

7

Thanks for the replies and tips. The process is much simpler than I had feared.