529 College Savings Pitfalls

In honor of 5/29 day, we’re looking at college spending rather than college savings. It won’t be long before those tuition bills start arriving.

The common mantra has always been “Save, save, save!” This is especially true when it comes to funding higher education expenses.  College is going to be expensive and the fear is always … do we have enough?

What happens now that your “child” is college bound and it’s time to spend, spend, spend? Here are some common mistakes to avoid when withdrawing from your Section 529 Qualified Tuition Plan account.

Taking Too Much: Redemptions from a 529 account are tax free to the extent there are qualified higher education expenses (QHEE) to support the amount withdrawn. QHEE includes tuition, fees, room and board (full-time students), books and supplies. Should the amount withdrawn from the account be greater than the student’s QHEE, the excess is deemed a non-qualified distribution. The beneficiary must report any non-qualified distributions as taxable income and pay a 10 percent penalty on the earnings portion of the distribution. If you are taking any credits on your tax return attributable to education, be sure to consult your accountant to avoid any “double-dipping” when matching QHEE.

Taking Too Little: Taking too little could result in having leftover funds in the account once your child has graduated from college. The funds remaining in the account will not have supporting QHEE to match withdrawals. When this occurs, the distribution is deemed non-qualified and the account owner will incur a 10 percent penalty on the earnings portion of the distribution. To avoid this scenario, be sure you fully understand which education expenses are QHEE to ensure you are taking the appropriate amount from the 529 plan each semester.

Mismatching Years: While not explicitly stated by the IRS on any publications or forms, redemptions from a 529 account must match with the year the QHEE are paid. You can insure proper matching by having the 529 distribution payment sent directly to beneficiary’s school. Check with your child’s college prior to making any payments directly to the school to make sure you fully understand how 529 distributions are treated by the institution during the financial-aid process.

Lack of Coordination: If a child is lucky, they will have multiple 529 accounts that have been established for their benefit by multiple account owners such as parents, grandparents, relatives and family friends.  When it comes time to pay for the beneficiary’s tuition, be sure to coordinate with the other account owners so everyone is on the same page. Coordinating the payments from separate account holders will help you avoid late fees or over-contributions.

Source: http://www.savingforcollege.com/