How do you withdraw funds from a 529 plan to pay for college?


Quick Answer

Distributions from 529 plans to pay for college are made to the owner of the account, the student or directly to the educational institution, reports Bankrate. The most efficient method for tax reporting is to write the check in the name of the student.

Continue Reading

Full Answer

As long as educational expenses do not exceed the amount of the distribution, the designated beneficiary does not have to report withdrawals from a qualified tuition program such as a 529 plan as income, according to the IRS. Paying out the distribution to the student as designated beneficiary creates the simplest tax scenario, as the student does not report the distribution on Form 1040, states Bankrate. Additionally, if the distribution exceeds expenses, the student is probably in a lower tax bracket and incurs less tax cost. Distributing the check to the account owner rather than the beneficiary causes the IRS to notice and possibly investigate the validity of the tax-free transfer.

Sending the check directly to the school is unwise because the school may treat it as a source of outside income, such as a scholarship, and decrease the student's financial aid, as reported by Bankrate. Funds over those needed for educational expenses in a 529 plan can be rolled over into a new 529 plan for another member of the family rather than withdrawn and taxed, reports the IRS.

Learn more about Financial Planning

Related Questions