The Do's and Don'ts of 529 Plan Withdrawals

Tax-advantaged 529 college savings plan assets are expected to balloon to $237 billion by the end of 2015, according to Financial Research Corporation. If you or someone in your family is planning to start college soon, you might be poised to withdraw money from one of these plans. Before you do, the Pennsylvania Institute of Certified Public Accountants (PICPA) offers the following advice.

Do Understand the Rules
These plans are named after Section 529 of the Internal Revenue Code, the tax rule that allows you to set aside money for qualified higher education expenses without paying taxes on earnings or interest on those savings. According to the IRS, qualified higher education expenses include tuition, fees and related books, supplies and equipment, and limited amounts for room and board. If you have questions about what else is included, contact your CPA for more information.

Don’t Take Too Much
To be completely tax free, withdrawals must be used to pay qualified expenses during the current tax year?or calendar year?not the current school year. So, if you will need $20,000 to pay for your child’s tuition from September through May, start by taking only what you need to cover costs through December, when the tax year ends. Once January arrives, withdraw the remainder of the money needed for the academic year. There are options available for those who have taken too much in any calendar year, so consult your CPA for details if you’re in this situation.

Don’t Take Too Little
If there is money left in your 529 plan after your child graduates, you may end up paying taxes on your investment earnings if they aren’t used for qualified higher education expenses. All is not lost, however. This money can be used to fund your child’s graduate education, or you can change the account beneficiary to another family member if he or she has qualified higher education expenses to pay.

Do Consider Financial Aid Issues
Some families are concerned that having savings in a 529 account will prevent them from receiving an attractive financial aid package. For that reason, grandparents may create 529 plans for their grandchildren to avoid this problem. The best steps for you will depend on many factors. This is a good question to discuss with your CPA, who can help you put together a college savings plan customized to your specific needs.

Don’t Overlook the Impact of Education Credits
Qualified higher education expenses must be reduced by any financial aid the student receives and any tuition and related expenses taken into account in determining any education tax credits claimed, such as American Opportunity and Lifetime Learning Credits.

Do Consult Your CPA
If you have questions about saving for college tuition, or any other financial issues, be sure to turn to your local CPA. He or she can provide the advice you need to make important financial decisions. To find a CPA in Pennsylvania by location or area of expertise, visit