Managing a 529 College Savings Plan Transfer

I've got money in a 529 plan for college but I'm not sure how to access it or transfer it to cover tuition. Can anyone explain the process or any possible mistakes to avoid?

Once you're ready to pay for college-related expenses, it's rather straightforward to withdraw money from a 529 College Savings Plan. But, there are some things to keep in mind.

First, remember that the funds in a 529 savings account can be used tax-free for qualified education expenses. These include tuition, fees, books, supplies, equipment, and, for students enrolled at least half-time, room and board.

Next, you have to request a withdrawal. The procedure for this can vary slightly across 529 plans and providers. Typically, you can do this online through the platform where your 529 plan is managed. If you're unsure, you might need to read through your account's FAQs, refer to the documentation you received upon opening the account, or give the plan's customer service a call.

When you make a request, you'll have to indicate whether the money should be sent directly to the educational institution, to the beneficiary (the student), or you as the account owner. Be aware that sending the money to the school directly could cause the school to reduce the student's financial aid, based on the amount of the 529 plan withdrawal. It's always a good idea to contact the school's financial aid office to understand their policy beforehand.

The whole process may take a couple of weeks to effect, so it's wise to initiate the process well in advance of when the payments are due.

As for potential pitfalls, ensure that your withdrawal aligns with the timing of your expenses. The IRS requires that 529 withdrawals and the payment of qualified expenses occur in the same tax year. If you make a withdrawal in December 2024, for example, but don't pay the expense until January 2025, that could be an issue.

Lastly, try to use the funds appropriately to avoid taxes and penalties. Any money withdrawn that doesn't go to a qualified education expense may be subject to income tax, as well as a 10% penalty on the earnings portion of the distribution. So, plan your education expenses clearly to avoid any unexpected financial consequences.