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Spending Those 529 Savings for the First Time? Tips for Parents of Freshmen Entering College

Much to the dismay of students across the US, for many of them the start of the school year is less than 30 days away. We spend a lot of time as advisors helping our clients determine the best way to save college (click here if you want to schedule an appointment with one of our advisors to help you!). However, this article is for the parents who are ready to start paying for college with the funds they have accumulated in their 529 plans. As with many financial topics these days, the decisions that parents face when thinking of using the funds in a 529 can be complex. The biggest pitfall? If not done with a strategic approach in mind, it could mean excess taxes and penalties paid to Uncle Sam!

Here are some best practices that you should consider before you start paying for kiddo’s college. (Note: this article is not going to cover the recent expansion in which 529’s can be used to cover education expenses for k-12.)

 


Fast forward to the 7 minute mark to see his segment.

What are qualified expenses?
Withdrawals from 529s will be exempt from federal taxes if the funds are used to pay for “Qualified Higher Education Expenses” or QHEE’s.  As 529s have grown in popularity, so has the list of items that are considered QHEE’s. The most popular ones are as follows:

What’s not qualified?
If you pay for an expense from a 529 that is not considered “qualified”, there is an IRS penalty that will have to be paid. The entire distribution will be considered “taxable income” and there is an additional 10% penalty on the earnings portion of the distribution.  The most common college “expenses” that folks try to pay for, but you cannot use the 529 for, are as follows:

Other Helpful Tips:           



Derek Amey serves as Partner and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at damey@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or of our parent company, Focus Financial Partners. LLC. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.