Withdrawing 529 Funds Without Penalty

 

Withdrawing 529 Funds Without Penalty

 

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Setting up and contributing to your 529 plan is easy, but you may have questions about how to withdraw funds from your 529 plan without penalty. With a 529 education savings account, you may withdraw for education expenses at any time and in whatever amount you decide. However, withdrawals must be for “qualified education expenses” to withdraw without penalty. These are expenses associated with the enrollment and attendance at a private or public college, university, or other qualified post-secondary education institution. Keep reading to learn more about qualified expenses and how you can make 529 withdrawals tax and penalty free.

Withdraw for Qualified Expenses Without Penalty

Funds for qualified expenses can be withdrawn from your 529 account without penalty. These include tuition and fees, room and board, textbooks and lab fees, special needs equipment, some study abroad programs, and technology required for coursework. Withdrawals for non-qualified expenses– including transportation, cell phones, and fees for sports or clubs – are subject to tax, plus a 10% penalty on the earnings, so make sure you are using 529 funds correctly. You can also withdraw up to $10,000 per year to pay for K-12 for tuition expenses, without penalty*.

* Please note, if you are a New Mexico resident, New Mexico does not permit state tax deductions for contributions used to pay for K-12 tuition payments and transfers to an ABLE account. It likely will not allow deductions for contributions used to pay for student loan repayments and apprenticeship programs. The amounts deducted for these purposes may be recaptured as state taxable income in subsequent years. Click here for more information.

Rules for Withdrawing 529 Funds Without Penalty

Before withdrawing funds, add up all your expenses and rule out those non-qualified education expenses. Remember to review, if applicable, any federal tax credits. You want to avoid "double-dipping" your tax breaks.

When you are ready to make a withdrawal, contact your 529 plan. Most 529 plans have an online portal or a withdrawal form. Be aware of deadlines for the most pressing items, such as tuition, as there may be temporary withdrawal restrictions. Check with your child's institution to see if you can make automatic payments from the 529 account directly to the eligible institution. The Education Plan – New Mexico's 529 College Savings Plan option – can send a check to the institution, the account beneficiary, or the account owner. It's your decision.

How to Withdraw from Your 529 Plan Without Penalty

Timing and documentation are also important when it comes to withdrawing funds penalty free! Make sure you withdraw and spend the money withdrawn in the same calendar year, not the academic year. Otherwise, you run the risk of mismatched reporting with the IRS, and your withdrawals, even for qualified education expenses, may be subject to tax and penalties.

The IRS can ask for proof of your qualified withdrawals. This means keeping detailed records, including account statements with tuition and room and board. Receipts for computer equipment, accessories, software, and internet should be saved, along with syllabi documenting course requirements (e.g., lab fees). We recommend keeping canceled checks and any records showing withdrawals for all qualified education expenses to document your spending for at least three years, if not longer when required.

● Some of this may seem burdensome or confusing, particularly given the documentation required.

If you are concerned about withdrawing from your 529 account penalty free, we're here to help. You can reach out to our team with any questions about how to make a withdrawal here. https://theeducationplan.com/contact

 

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For more information about The Education Plan, call 1.877.337.5268 or view the Plan Description and Participation Agreement, which includes investment objectives, risks, charges, expenses, and other important information; read and consider it carefully before investing.

Please Note: Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program. You also should consult a financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plan’s features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

The Education Plan is administered by The Education Trust Board of New Mexico. Ascensus College Savings Recordkeeping Services, LLC, the Program Manager, and its affiliates, have overall responsibility for the day-today operations, including investment advisory, recordkeeping and administrative services. The Education Plan’s portfolios invest in: (i) mutual funds; (ii) exchange traded funds; and/or (iii) a funding agreement issued by New York Life. Investments in The Education Plan are not insured by the FDIC. Units of the portfolios are municipal securities and the value of units will vary with market conditions.

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