Money saved in a 529 plan can be withdrawn tax-free to pay for qualified education expenses, which include costs required for the enrollment and attendance at in-state, out-of-state, public and private colleges, universities or other eligible post-secondary educational institution. Qualified 529 plan expenses also include up to $10,000 per year in K-12 tuition expenses.
It’s up to the 529 plan account owner to calculate the amount of the tax-free distribution and how they want to receive the funds. Withdrawal requests can usually be made on the 529 plan’s website, by telephone or by mail.
Here are four steps to help you navigate the 529 plan withdrawal process and avoid paying taxes and penalties on your savings.
Step 1 – Calculate your qualified education expenses
529 plan account owners can withdraw any amount from their 529 plan, but only qualified distributions will be tax-free. The earnings portion of any non-qualified distributions must be reported on the account owner’s or the beneficiary’s federal income tax return and is subject to income tax and a 10% penalty.
To calculate a 529 plan beneficiary’s qualified education expenses, first add up:
Next, subtract any tax-free educational assistance, including:
Next, subtract the amount of any expenses used to justify the American Opportunity Tax Credit (AOTC) or Lifetime Learning Tax Credit (LLTC).
For example, a beneficiary who claims the maximum $2,500 AOTC, has $10,000 in qualified expenses and won a $2,000 tax-free scholarship may withdraw $4,000 tax-free from a 529 plan:
$10,000 - $4,000 (used to generate AOTC) - $2,000 (scholarship) = $4,000 tax-free 529 plan distribution
In this example, if the 529 plan account owner withdraws more than $4,000 the excess distribution will be considered non-qualified. The earnings portion of the non-qualified distribution is taxable, however, the 10% penalty may be waived on a non-qualified distribution up to $2,000 (the amount of the beneficiary's scholarship) . Other exceptions to the 10% penalty include:
Step 2 – Determine when to withdraw
Distributions should be taken during the same year in which the qualified expenses were paid. For example, do not include second semester tuition expenses that were paid in December of the previous year.
Step 3 – Decide which 529 plan account to withdraw from
If the beneficiary has more than one 529 plan, consider withdrawing from a parent-owned 529 plan account first. Funds withdrawn from a grandparent-owned 529 plan count as student income on the Free Application for Federal Student Aid (FAFSA) and may hurt the student’s eligibility for need-based financial aid.
One workaround is to wait until after January 1 of the student’s sophomore year of college to take a withdrawal from a grandparent-owned 529 plan (assuming the student will graduate in four years). Since the FAFSA uses tax and income information from two years prior, there will be no subsequent year’s FAFSA to be affected by the distribution. If the student will graduate in five years, the grandparent 529 plan should be used after January 1 of the student’s junior year.
Step 4 – Complete a withdrawal request
Parents can withdraw 529 plan funds by completing a withdrawal request form online. Some plans also allow 529 plan account owners to download a withdrawal request form to be mailed in or make a withdrawal request by telephone.
Is a contribution to a qualified tuition plan (a code section 529 plan) is treated as a gift is a present interest
Is a contribution to a qualified tuition plan (a code section 529 plan) is treated as a gift is a present interest
2. Martha participated in a Section 529 qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition. a. Martha is not required to include the $2,000 ($8,000-$6,000) in her gross income when the funds are used to pay the tuition. b. Martha's son must include the $2,000 ($8,000-$6,000) in his gross income when the funds are used...
HVIcw I ULSTS I PETICI -ED THIS? Read Section 12.8 (Pages 527 - 529): eh KCV 12.8. Identify the phase(s) present at each point on the diagram. Match the items in the left column to the appropriate blanks in the sentences on the right sider the phase diagram shown below. liquid At point a, a would be present Pressure (not to su liquid-gas equilibrium At point b, a would be present gas At point ca would be present solid-liquid-gas equilibrium...
payment should include a debit to Interest Payable for $529 debit to Interest Expense for $529 credit to Cash for $52,936 credit to Cash for $59,288 On June 8, Alton Co. issued an $74,400, 10%, 120-day note payable to Seller Co. Assume that the fiscal year of Seller Co. ends June 30. Using a 360-day year in your calculations, what is the amount of interest revenue recognized by Seller in the following year? When required, round your answer to the...
QUESTION 16 plan at work, A 529 plan is: A defined contribution retirement plan offered by not-for-profit institutions A type of retirement plan that individuals can make use of, regardless of whether they are covered by The savings account component in a Health Savings Account An account that allows you to purchase life insurance with before tax dollars. A tax-sheltered savings accounŅor higher education expenses.
6. A 529-state-approved Individual Retirement Account (IRA) permits parents to invest tax-free dollars into their children's college education fund (this money may only be used for educational expenses). Another popular plan, the Roth IRA requires after-tax dollars to be invested in a savings fund that may or may not) be used for paying future college expenses. Both plans are tax free when the money is eventually withdrawn to assist with college expenses. Clearly, the 529 IRA plan is a better...
If an account has a credit balance of $790 in the Trial Balance section of a worksheet and there is a credit of $380 in the Adjustments section, the account balance in the Adjusted Trial Balance section of the worksheet is Multiple Choice $1,170 debit. $1,170 credit. $410 debit. $410 credit.
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