529 plan distributions can be trickier than you might’ve thought. When doing your college planning with your child, it is also important to plan for 529 plan distributions. This write-up is not all-inclusive and you should always check with your accountant on tax advice.
What is a qualified expense; they are tuition, fees, books, supplies, equipment, and room & board. In other words, typical college expenses. This is an easy calculation to make if your child is living on campus. If living off-campus, the University will have the formula to make sure that the distribution is below the qualifying limits. It is important to check with the University for what is required for the classes.
You should take the distributions within the year of the qualified expense. Keep track of receipts of your qualified expenses. At the end of the year, you will receive a 1099–Q from the 529 plan custodian. You’ll need to go over this with your accountant that the expenses were qualified. Your accountant will probably make sure that you have your records. You pay no tax if all the expenses were qualified. I would give your accountant a heads up that you’ll be making 529 plan distributions. You should also ask them for their distribution suggestions or advice.
If you’re asking yourself who gets the 1099-Q the answer is it depends. If you take the distribution to reimburse yourself for qualified expenses that you paid for, you will get the 1099-Q. If you send the funds directly to the Office of Bursar at the college, the beneficiary gets the 1099-Q. It may be that your child will pay for some expenses and you will send them a reimbursement directly from the plan, in that case, they will get the 1099-Q. In any regard, it’s important to keep your records.
You must subtract from the qualified expenses any amount that they receive in any tax-free educational assistance, including Tax-free scholarships, fellowships, and Pell Grants. It’s also important to remember how you take the 529 plan distribution can affect financial aid.
The creation of 529 plans can be a huge benefit to families and required just a little bit of planning. If you have any questions please give us a call.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.
John Schooler CFP®, CFS®, ChFC®
Senior Financial Advisor
