By Debbie Placke, Vice President, Manager Financial Planning Tools and Marketing
As the year comes to an end, there are so many things to think about. The holidays, guests, gifts and celebrations are probably all front in your mind. Don’t let all of these things distract you from keeping your finances in check. If you have a child who is attending a private school or university adding extra expenses to your budget, don’t forget that 529 plans that can be used to pay for or reimburse these education expenses.
Year-end financial burdens can add stress to the holidays. If you have been saving in a 529 plan, it can help lessen the load that education expenses can add. Make sure you understand what expenses are “qualified” education expenses to make use of the tax-advantages that the 529 plan offers.
Withdrawal of the funds in a 529 plan are income tax-free when used for qualified higher education expenses which include; tuition, fees, books, supplies, equipment and some housing expenses for students who are at least half-time. If you have already paid these expenses this year, you can reimburse yourself by withdrawing from the plan in the same calendar year. Make sure that you take out the exact amount to match the qualified expenses covered in that calendar year. Any amount distributed from a 529 college savings plan that is not used for qualified education expenses in the same calendar year is a non-qualified withdrawal. This can happen if you take out more than your qualified expenses in a given year (or if you are using the 529 plan for expenses that are not considered qualified). The earnings portion of a non-qualified withdrawal is subject to federal income taxes in addition to a 10% federal tax penalty.
If the bill for the spring semester comes in December, it is important to remember that the distribution from the 529 must be taken in the same calendar year that the payment is made. There is no clear-cut rule on the distributions matching the year that the expenses are incurred, however, it is a generally accepted tax accounting practice to do so. In many cases, you have the option of paying the spring semester bill in either December or January. If you wait until January to pay the spring semester bill and take the 529 plan withdrawal, you avoid any confusion. Contact your tax advisor for your specific situation if you have questions.
Ask your Benjamin F. Edwards financial advisor for more information on investing in your child’s future.