Back to School Tip: Prepare Now for 529 Withdrawals

By Curtis Loftis CONTRIBUTOR

As a firm believer in the many benefits of saving with a Future Scholar 529 plan, I commend families who consistently contribute to their accounts to help pay for a loved one’s future education. They can be proud their dedication will provide funds to help cover qualified expenses for 529 beneficiaries taking the next important step in their educational journey.

When that exciting time comes, you won’t need to worry. The process of withdrawing 529 funds isn’t difficult. But as always, it helps to be prepared.

Most 529 plans will allow you to make a withdrawal request by accessing a form on their websites, by mail or by telephone. Usually, the most efficient way to receive your withdrawal is to have your funds deposited directly into your bank account or the beneficiary’s bank account. You can then simply submit the payment to your child’s school electronically or reimburse yourself if you have already paid for qualified education expenses.

If you choose this method to receive your funds, be sure to have your bank account on file with your 529 plan at least 30 days before you plan to withdraw your funds. Take time to visit the website of your child’s school to be sure of the date the payment is due. Sending your payment early will ensure you avoid class cancellation.

To avoid tax penalties, you will want the funds you withdraw to pay for qualified education expenses only. Qualified education expenses for higher education include tuition, fees, books, supplies, computers, equipment, meals and housing (if your student is at least part-time). For K-12, qualified education expenses include tuition up to $10,000 per year per beneficiary.

You will receive a Form 1099-Q at the end of the year for all withdrawals, but those used for qualified education expenses will not be taxed. In the event that funds are used for non-qualified purposes, the earnings portion, not the contributions themselves, will be taxed and you may also incur a 10% federal tax penalty. Be sure to consult with a tax professional if you have any questions.

You should withdraw your funds in the same calendar year you plan to use them so that the year’s withdrawals match up with the year’s education expenses. Be sure to keep all of your receipts. Toward the end of the year, go back through expenditures to make sure you have withdrawn funds to cover all qualified education expenses. Be sure to give your 529 plan administrator enough time to process your withdrawal request in the same calendar year.

Helping your child prepare for higher education can raise lots of additional questions.

• Where can I use 529 funds? Your 529 funds can be used at any eligible educational institution in the U.S., as well as many international schools. These institutions include two- and four-year public and private colleges, graduate and professional programs, as well as vocational and technical schools. A full list of eligible institutions is on the Federal Student Aid (FAFSA) website.

• How does my 529 account affect financial aid? When determining eligibility for financial aid, funds in a 529 account are treated as the account owner’s, not the child’s, assets. In 2022, only 5.64% or less of the account’s value will be factored in for financial aid purposes.

• What if my child receives a scholarship? If your child is lucky enough to receive a scholarship, you may withdraw up to the full amount of the scholarship without tax penalty. You will only be responsible for paying income tax on the earnings portion of the withdrawal.

Congratulations on a job well done. You are providing a loved one with the incredibly important and lasting gift of education. Over the years, you’ve worked toward the meaningful goal of saving for your child’s future.

Curtis Loftis is the State Treasurer of South Carolina. He also serves as the administrator of South Carolina’s Future Scholar 529 College Savings Plan.