Paying college bills with
your 529 savings

Nov 22, 2016
By BlackRock

Next to retirement, college is among the biggest financial obligations many families will face. And just as transitioning from retirement saver to spender requires a thoughtful approach, so too does drawing down a
529 college savings plan.

“After years of saving for college, you don’t want to misstep when it’s time to use your 529 assets,” says Rob Kron, Head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group, who offers these helpful tips for tapping your 529 account:

Decide who gets the money

Most 529 plans allow you to direct distributions to yourself, to the account beneficiary or to the college. Some plans allow 529 monies to be directed to other parties as well, perhaps the school bookstore or an off-campus apartment building.

Sending the distribution directly to the school can be advantageous in that is serves as documentation for a qualified withdrawal. If you choose to have the money sent to you or your child, then you are responsible for paying the school (and for the all-important recordkeeping).

About those records …

If you have 529 monies sent to yourself or your child (via an ACH deposit to your bank account or by printed check), be sure to keep diligent records. Withdrawals from your 529 account are tax free — as long as the monies are used for qualified education expenses. If you withdraw more than the total eligible expenses in a given year, you are required to pay ordinary income tax and a 10% federal penalty tax on the earnings portion of any non-qualified distribution.

Know what qualifies

Many qualified education expenses are obvious: tuition and fees, on-campus housing, and the cost of books, supplies and equipment (including technology) required for attendance at your child’s school. Some items are trickier. A few that are not among the qualified expenses: transportation costs, insurance, sports and activity fees, and parking and library fines. In addition, student loans cannot be repaid with 529 funds.

Watch the calendar

You don’t have to wait for the tuition bill to come to withdraw your 529 monies. In fact, processing can take time at both ends of the transaction (from your bank to the school’s bursar’s office), so it can make sense to plan ahead. In doing so, know that the IRS requires that withdrawals from your 529 account match up with the payment of qualified expenses in the same tax year. In other words, don’t withdraw money this year that you plan to deploy toward college expenses next year.

Coordinate efforts

If your child is the beneficiary of multiple accounts, some coordination of withdrawals is in order. For example, where there’s a grandparent-owned account, it can make sense to spend the parents’ money first and the grandparents’ money last. That’s because funds from a grandparent-owned 529 count as income to the student and are reportable on the financial aid application, potentially reducing the amount of future aid. For this reason, some students opt to use the assets held in a grandparent-owned 529 in the final year of college since they will not be filing a federal financial aid application the following year.

Check your risk tolerance …
and your investments

In the early years, you were seeking growth of your 529 assets and had sufficient time to weather financial market volatility. As the tuition bill comes due, you have a much lower tolerance for losses. Check that your account is not heavy on very risky assets. Note that if your account is invested in an age-based strategy, the investments are automatically geared to grow more conservative as the college years approach.

Ultimately, there are a number of ways you may be able to optimize your 529 account — and avoid potential pitfalls. Consult with your financial and tax advisors to determine how to make the best use of your hard-saved dollars.

Speak with your financial professional about the 529 programs available through BlackRock or visit our 529 college savings plans today.

 

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Rob Kron
Head of Investment & Retirement Education
Rob focuses on the development and delivery of practice management, wealth management and market insight programs.