My son will be a freshman in college next month, and we’re going to start using his 529 account. What costs are considered qualified expenses? Do I withdraw the money first and then pay the college, or does the money need to be transferred directly from his 529 to the college?
You can use 529 money tax-free for tuition, room and board. If your son lives off campus, you can withdraw up to the allowance for room and board, as determined by the college in the cost of attendance for financial aid purposes (the financial aid office can give you the number).
Books, equipment and supplies qualify if they are required for enrollment or attendance, says Joe Hurley, of Savingforcollege.com. Computers do not qualify unless the college specifically requires that your student have one (computers were eligible for tax-free 529 withdrawals in 2009 and 2010, but the provision was not extended). For a full list of eligible expenses, see the qualified tuition program section of IRS Publication 970, “Tax Benefits for Education.”
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You can usually request the withdrawal by phone, mail or online (the specifics vary by 529 administrator). Vanguard, for example, will send the money to you by check or electronic transfer to a bank you specify, or a check can be sent either to the beneficiary or the educational institution (you need to provide the school’s name and mailing address and your child’s student identification number if the money is sent directly to the school). Give yourself plenty of time. A withdrawal sent by check may take seven to ten business days to reach its destination; electronic transfers to the account owner’s bank may take three to five business days.
Ask your plan administrator if it requires proof that the withdrawal is for a qualified expense. Vanguard is among those that don’t. Either way, you or your son should keep receipts of the payments in case the IRS questions them later. The plan will generate an IRS Form 1099-Q in January of the calendar year following the year the withdrawal was made and send it either to the account owner or beneficiary, depending on who received the withdrawal.
