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How to get money out of 529 account?

Columbia_StudentColumbia_Student Posts: 5,046Registered User Senior Member
Hi,
I was wondering if someone could explain to me what do I have to do to get money out of D's 529 account. Is it just present the receipt to the financial center(ie Fidelity in this case) and then Fidelity will reimburse D the money. Is purchasing a laptop considered ok for this purpose?

Thanks ahead.
Post edited by Columbia_Student on
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Replies to: How to get money out of 529 account?

  • swimcatsmomswimcatsmom Posts: 14,876Registered User Senior Member
    I don't think you can get a laptop with 529 account money. Unless maybe a laptop is included in the school's COA.

    The definition of 'qualified expense' for a 529 is a lot more flexible than for the other tax education benefits. The relevent publication is IRS 970

    http://www.irs.gov/pub/irs-pdf/p970.pdf

    page 49 has explanations for 529 account qualified expenses. If the laptop is required you may be able to use it. But otherwise my personal interpretation (I'm not a tax accountant) is that you probably cannot. I would be interested in hearing from a tax accountant.

    We withdrew some money from our sons 529 account. We had to contact the 529 account and get a form which we filled out and signed and they paid the money out.
  • thisoldmanthisoldman Posts: 1,045Registered User Member
    Couple of thoughts:

    Thought I:
    1) 529 can be used for college expenses incurred in a calendar year.
    2) Unless you are atypical, Your college expenses will exceed your 529 funds.
    3) So if 1 And 2 happens, how does someone distinquish whether a 529 reimbursement goes to particular expense A or "expense B"?

    Thought II:
    If you boil it down to the essence, a 529 is there for you to prepare for expected college expenses, for which the Government/taxpayers will give a favorable tax treatment. Let it go at that and not look for the fine print.

    Consult your advisor(s).
  • swimcatsmomswimcatsmom Posts: 14,876Registered User Senior Member
    Well there are quite specific tax rules for 529 account withdrawals and all the other education tax breaks - so (for myself) I do look at the fine print. This year we had a combination between two kids of Hope tax credit, 529 account withdrawals, and figuring out the taxability of scholarships and grants. Looking at the fine print enabled us to maximize our tax benefits.

    Plus I have never been audited and hope I never will be but if i ever am I want to make sure I have the paperwork to support whatever i have reported.
  • Columbia_StudentColumbia_Student Posts: 5,046Registered User Senior Member
    Consult your advisor(s).

    My advisor(s) are CC, Turbo Tax, and whatever knowledge I gained went I had a minor in business. :D

    swimcatsmom, thank you for the link and info. I have to read the fine print as well to see what else I can deduct this coming year.
  • entomomentomom Posts: 23,330Super Moderator Senior Member
    I'm with SCM. I asked my financial advisor about this and came to the same conclusion that a laptop was not "required" by any classes. While I agree with TOM's poiint 2, I think the opposite follows for point 3--since expenses will likely be greater than 529 funds, why not withdraw for purchases well within the definition of qualified educational expenses? That way, if you are audited, you will have receipts to support your transactions.

    About how to get the money from Fidelity--request a Distribution Authorization Form from them. You won't need any receipts, they are only necessary for tax purposes.
  • swimcatsmomswimcatsmom Posts: 14,876Registered User Senior Member
    You're welcome. I actually have an excel spread sheet with all the expenses so I can try to figure out what will be the best use of my dollars and save the most tax dollars. I started it last year when I was trying to figure out how much we could take out of my sons 529 account without tax or penalties and still let him get the maximum from the Hope tax credit. We probably under withdrew from the 529 as I was in the midst of figuring when I had to go to England suddenly because of a family illness. So we guesstimated and were very conservative. I am already keeping a very close track this year. But it is actually simpler because my son has stopped going to college - permanently this time I think :( so it is just my daughter and hers is a case of figuring out how much of her scholarship/grants are taxable. There is some rule about being able to take money out of the 529 account without penalty if it is because without penalty if it is because the student has scholarships but i have not quite plucked up the nerve to approach that yet.

    The differing rules for each tax exemption make my head spin a bit.
  • swimcatsmomswimcatsmom Posts: 14,876Registered User Senior Member
    -since expenses will likely be greater than 529 funds, why not withdraw for purchases well within the definition of qualified educational expenses?

    The only thing to be cautious about here is tying it in with the other possible tax benefits as you cannot 'double dip' by using the same qualified expenses for more than one benefit. So, for instance, if you are eligible for the hope tax credit, it may be more beneficial to not use 529 account funds to pay for the first $2200 of tuition and fees as they could get you a tax credit of $1650 (100% of the 1st $1100 and 50% of the 2nd $1100). If are using that $2200 to justify a 529 account withdrawal you cannot also use it to claim the tax credit. So really a good idea to have a look at the options first and see what will be the most beneficial.
  • thisoldmanthisoldman Posts: 1,045Registered User Member
    ask them if books are specifically required, pencils and paper. I very much doubt that any one can find a "required" item other than tuition and mandatory fees.

    A reasonable person would imagine that a student would be "required" to have a computer for engineering, computer science (at least in S program), or design. Actually not, because pencil and paper are still necessary. However, homework that requires words and sentences, the requirement is to submit via computer-internet-doc.format. Therefore, if the English class does not specifically require a computer, how does one submit a paper without a computer? How does a computer programmer test a program without a computer, if access to school's equipment is limited?

    In my day, we did not have to have a typewriter, but all papers must be submitted typed.

    Reread your 529 prospectus and see how open the conditions are; Here is Oregon's: "Qualified Higher Education Expenses currently include tuition, fees, books, supplies, and equipment, for the enrollment or the attendance of a Designated Beneficiary...

    Ask a college student, "what exactly is required, and is that requirement written down. " The best I can do is "required reading".

    no cheese left.
  • thisoldmanthisoldman Posts: 1,045Registered User Member
    Very few of us will have 529's that exceed expenses. Those that do, have all the cheese. :)

    the cheese stinks.
  • Lafalum84Lafalum84 Posts: 7,519Registered User Senior Member
    I just called Fidelity (our 529 manager), got a form and filled it out. Used it to pay for tuition, room & board. We paid books etc (and laptop) from other funds. I figure as long as what we pull out of the 529 is equal-to-or-less-than the price of tuition, room & board, we're good with the gov't.

    thisoldman, I have no cheese. When the 529 plan runs out.... hello, home equity loan.
  • swimcatsmomswimcatsmom Posts: 14,876Registered User Senior Member
    A reasonable person
    But I thought we were talking about the IRS here ;)

    Seriously from what I have been able to deduce from googling this question the definition is 'required' as opposed to 'needed'. There are a couple of references to judgements in tax audits where general supplies such as pencils and paper were not allowed. The definition for 'required' books includes books specifically 'required' for all students doing a course such as a chem text book but not books one might think are needed such as a dictionary for English Comp. And computers seem only to be allowed if specifically required by a class - my daughter uses computers in all her classes and certainly needs one - but they are not required in any of her classes.
    Very few of us will have 529's that exceed expenses
    My daughter elected to go to a State U so as to keep debt to the minimum as she plans to go to medical school. As this put her in the upper few % points stats wise she has a very good scholarship that pays most of her expenses and has some financial aid including a small amount of loans that covers the rest. Between what is left in my sons 529 (I don't think he will return to college)and what is in hers we have enough to pay part of what her scholarship covers if she should lose it (so far so good there), about the 1st year of medical school if she does go there, or pay off her loans with a little left over if she does not. The quandry is that if she does not go to medical school and we use the funds to pay off her loans - paying loans is not a qualified expense so withdrawing the money will incur taxes and penalties. So do we , not being able to see into the future and whether she will go to med school, pull the money out of the 529 account based on her having the scholarship piecemeal using the fact that she has scholarships as the basis (thus having it available penalty free for the loan pay off) or leave it there and risk the 10% penalty. It is not a vast amount of money - but we are not that well off and I begrudge giving the govt any more money in taxes than I absolutely have to! Don't mind the taxes - don't want the penalty.
  • Columbia_StudentColumbia_Student Posts: 5,046Registered User Senior Member
    The good news is I don't have all D's college money in 529 account. However, I just need to get the money that I have in that account out.
    Hopefully, I will have some money left to buy some fromage camemberts(French stinking cheese) when D is through with college. Thank you all for your contributions.
  • entomomentomom Posts: 23,330Super Moderator Senior Member
    SCM,
    Thanks for the tax tip on the Hope credit & 529 withdrawls! I don't qualify this year, but maybe in the future.
  • GroovyGeekGroovyGeek Posts: 889Registered User Member
    Good discussion about 529s... another related question is whether it is better to draw down 529's and other student assets gradually or front/back-load them. D as about $20k in 529 and another $20k in UTMA, I was planning on drawing down $5k of each over 4 years.
  • swimcatsmomswimcatsmom Posts: 14,876Registered User Senior Member
    Groovy - from a financial aid point of view - the UTMA is a student asset for FAFSA so 20% of the balance will go to the EFC ($4000) while the 529 is a parent asset so only 5.6 ish % ($1100ish) goes to the FAFSA EFC. So from an asset point of view the money left in the UGMA will have a worse impact on the EFC (if that is an issue for you). But I am not sure of the impact of the withdrawals income wise - 529 should not have an impact if the withdrawals are for qualified expenses - i have no clue how UGMAs are treated (if there is an income aspect from sale of stocks etc).
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