What You Should Know Before Making a Withdrawal on Your 529 Plan

For families ready to make withdrawals from their 529 plan, there are some important things to remember. Qualified expenses fall into four big categories and any non-qualified withdrawal will garner big tax fines.

According to the IRS, the four qualified purchases on which 529 plan funds can be spent are:

1. Tuition and Fees: Any school program that can accept federal student aid is a qualified program for expenses. This includes vocational schools, technical schools and some certification programs along with traditional colleges and universities.

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2. Books and supplies: The purchase of computer equipment is a qualified expense. Internet access fees and printers also qualify, as well as educational software used by the beneficiary or the beneficiary's family during the years the beneficiary is enrolled in a qualified institution

3. Room and board: The amount here cannot exceed the actual amount charged for the student to live in the college or institution's student housing. Students must also be enrolled at least half-time in order to qualify for a room and board expense.

4. Special needs services: A student with special needs can use 529 plan withdrawal cash for the cost of special services needed to attend school at a qualifying institution.

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There are two basic ways to make withdrawals. Some plan managers, like Fidelity Investments have special forms for withdrawals from a 529 Savings plan. They also allow an online banking type service for bill pay in any of the qualified areas.

Fidelity advises - that plan owners are responsible for making sure their expenditures meet IRS regulations for acceptable expenses. Look for a 1099-Q form at tax time to confirm the withdrawal amount.

Another important withdrawal consideration for 529 plan funds is that any grants,
scholarships or other tax-free assistance for college, including Pell grants, VA benefits and anything offered through an employer will reduce the amount of 529 plan funds that will be eligible for the tax-free withdrawal. Essentially, those monies must be subtracted from expenses before figuring the total.

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