Have you been putting money into your kid’s 529 college savings plan for years, waiting for the moment they go off to Harvard, hopefully with Harvard Business School to follow?
Well, good luck with the Harvard thing, but let’s talk about that 529 plan for a bit. They are 3 kinds of distributions from it: Qualified, Nonqualified, and Rollovers.
Qualified
When you use money from this account for school expenses, that’s a qualified withdrawal. Qualified expenses are tuition, books, supplies, equipment, and fees. When you’re making qualified withdrawals they should be tax-free, however be careful using 529 money when you’re also using a scholarship for part of your school expenses or claiming the American Opportunity Credit (AOTC) or Lifetime Learning Credit.
Scholarships and the tax credits can’t be used for the same expenses as withdrawals from a 529 savings account, so if you’re trying to use them all at the same time it can be complicated to figure out the best way to claim as much as possible while reducing your taxes as much as possible.
Qualified withdrawals can happen no matter what age the beneficiary is.
Nonqualified
If you end up withdrawing the money for non-education related expenses, you’ll end up paying income taxes on the withdrawal, but you’ll also end up paying a 10% penalty on the earnings. Check with your accountant or CPA for exceptions though.
Rollovers
You can move your money into the account of a family member, or another 529 account of which you are a beneficiary, and this is called a “rollover.” You need to complete a rollover within 60 days after you withdraw the money. Just a reminder though that it can take days to set up a new account and for the institution to process the deposit, so don’t wait until the last minute!
If you’re interested in starting a 529, or if you have questions about one that you have, please let us know and we’ll help.