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529 Withdrawals: Everything You Need to Know

 
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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 Make sure that you withdraw and spend the money withdrawn in the same calendar year, not academic year; otherwise, you will have mismatched reporting with the IRS, and your withdrawals, even for qualified education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.

 

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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.

Investment returns will vary depending upon the performance of the portfolios you choose. You could lose all or a portion of your money by investing in The Education Plan depending on market conditions. Account owners assume all investment risks as well as responsibility for any federal and state tax consequences.

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The Education Plan® and The Education Plan® Logo are registered trademarks of The Education Trust Board of New Mexico used under license.

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