529 Plan Withdrawals

     A 529 plan can be a great way to save for college. These work a little like Roth IRAs in that they are investment vehicles in which you won’t have to pay taxes on your investment’s growth. So, when it comes time to pay for college you can pull all that money out without having to worry about the tax implications.

Well, that’s actually only true to a point. Perhaps the biggest downside to 529 plans is that their monies can only be spent on what the federal government deems as “qualified expenses.” To paint a broad stroke, qualified expenses include tuition, room, board, books, as well as some necessary supplies including technological ones like computers, but it’s a little more complicated than that.

    You can’t just pull however much money you want from your 529 and say “We have a really nice off campus apartment, and the rent is really expensive. All this money is for that.” Every college publishes a detailed cost of attendance. I like to describe this as an all-inclusive price to attend a college and stay alive for a given year as it includes tuition, room and board, supplies, transportation, clothing, personal expenses, and computer and phone. Again, note that not all of these are considered “qualified expenses” for the purposes of 529 plans. For those that are, the amount the individual colleges assign to each category is significant because that is the maximum you are allowed to withdraw from a 529 plan to spend on that category. 

    For example, the University of Florida lists $5,800 as the average annual cost of housing for the upcoming school year. So, even if you’re paying $6,800 a year for your apartment at UF, you won’t be able to withdraw more than $5,800 from your 529 plan to pay for it. Again these numbers are specific to each university. So, at Emory University which is located in a nice area of Atlanta and where you would expect housing costs to be higher, the housing allowance is $9,254.

    Maybe it’s worth mentioning too that as with many other things on your tax return, the IRS doesn’t have an efficient system to verify what you’ve actually spent your 529 withdrawals on. It’s the honor system really. However, were you to be audited, the IRS would certainly want to see concrete documentation of what you spent your 529 withdrawals on and they might reach as far back as 6 years.

    To be sure, you can actually withdraw any amount of money from a 529 plan to spend on anything you want. It’s just that anything that doesn’t fall under the category of a qualified expense counts as income and is subject to a 10% penalty. This is true for the earnings portion of your investment and not the contribution portion. Some states like California, impose additional fees on unqualified withdrawals. So, do your research. Paying these taxes and penalties definitely diminishes the advantages of a 529 plan, therefore it’s best to plan ahead and avoid these when possible.