August is typically the month when students begin returning to college, or attending for the first time. For many, that means bills to pay. Fortunately, if you have a 529 education savings account, those bills won’t be so hard to stomach: you’ll have funds to draw on from years of investing for this very reason. Here are guidelines for making a withdrawal from your 529 account with The Education Plan®.

Qualified Expenses

With a 529 education savings account, you may make withdrawals from the beneficiary’s account for higher education expenses at any time and in whatever amount you decide; however, withdrawals must be for “qualified education expenses”. These include items such as tuition and fees, room and board, textbooks and lab fees, special needs equipment, some study abroad programs, and technology required for course work. Withdrawals for non-qualified expenses– including transportation, cell phones, and fees for sports or clubs – are subject to tax, plus a 10% penalty, so make sure you are using the funds correctly.

Rules for Withdrawals

Before you start withdrawing funds, add up all your expenses and rule out those that are not qualified education expenses. Subtract any tax-free money your child has received, such as scholarships, Pell Grants, employer or veteran’s educational assistance, as well as any federal tax credits such as credits from the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC). You want to avoid “double-dipping” your tax breaks. 

After this step, it’s time to make the withdrawal. To do so, submit a withdrawal request by logging into your account online or filling out this 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 school. The Education Plan – New Mexico’s 529 College Savings Plan option – can send a check to the institution, to the account beneficiary, or to the account owner. It’s your decision.

Documentation

The timing of your withdrawals is also important. Make sure that you withdraw and spend the money withdrawn in the same calendar year, not academic year; otherwise, you will have mismatched reporting with the IRS, and your withdrawals, even for qualified education expenses, may be subject to tax and penalties.

It’s also important to document your spending for at least three years, in case the IRS asks for proof of your qualified withdrawals. This means keeping detailed records that include account statements with tuition and room and board; receipts for computer equipment, accessories, software, and internet; syllabi documenting course requirements (e.g., lab fees); canceled checks and records showing withdrawals for all other qualified education expenses.

Some of this may seem burdensome or confusing, particularly given the amount of documentation required. But it can be as simple as four steps:

1. Total up your expenses
2. Subtract any tax-free money
3. Make the appropriate withdrawals for qualified education expenses
4. Keep records of your spending

If you are concerned about withdrawals from your 529 account, we’re here to help. You can reach out to our team with any questions about how to make a withdrawal here.