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Is this the correct way to withdraw money from College Savings Accounts?

jamgolfjamgolf Registered User Posts: 70 Junior Member
I have two educational savings accounts for my son, as 529 and an older Coverdell ESA totaling about $50K. He will start attending college next fall. I am thinking about the most financially beneficial approach to withdrawing funds from these accounts:
(A) withdraw a constant amount of $12500 every year
(B) withdraw the full $50K in the first year
(assuming the cost of attendance is $50000/year):

It seems to me that option (B) will be the correct thing to do, so in years 2,3,4 he will have a better chance to qualify for Financial Aid or will qualify for more aid than year 1.

Is my thinking correct?

Replies to: Is this the correct way to withdraw money from College Savings Accounts?

  • BelknapPointBelknapPoint Registered User Posts: 3,889 Senior Member
    I think what makes the most sense is to withdraw money as necessary to pay the cost of qualified expenses that are billed directly by the school, and to pay or reimburse for qualified expenses that are not directly billed, as the bills are presented or the expenses are incurred. Remember to make withdrawals for qualified expenses in the same tax year that the corresponding expenses are actually paid. In other words, don't make a withdrawal in December for a spring semester bill that you write a check for in January, or don't write the check in December for the spring semester bill and then take the withdrawal for those expenses in January.
  • jamgolfjamgolf Registered User Posts: 70 Junior Member
    @BelknapPoint

    Appreciate for your advice. I was not aware of the "same tax year" rule. It's very good to know. Thanks for that.

    I am still curious if using the money from the educational accounts BEFORE tapping any other finances whether personal assets or loans etc. is the right thing to do. I mean FIRST exhaust the funds saved in educational accounts (to pay for qualifying college expenses) and only then look at any other sources of funding.

    I am assuming this may qualify him for some financial aid in years 2,3,4 if the financial aid is a yearly matter.
    Am I right?
  • BelknapPointBelknapPoint Registered User Posts: 3,889 Senior Member
    Deciding which money to spend first is something that depends on the individual circumstances of each student and the student's family. Need-based financial aid is generally calculated on a yearly basis, so in the simplest terms, as reportable assets are spent down, need-based aid will usually increase each year.
  • brantlybrantly Registered User Posts: 3,417 Senior Member
    It depends where your child goes to school. If it's a school that meets 100% of demonstrated financial need and you qualify for FA, then spend the entire amount in year one. If the school does not meet 100% of demonstrated need, you are probably better off taking distributions of equal amounts each year.
  • twoinanddonetwoinanddone Registered User Posts: 19,540 Senior Member
    You can run the NPC right now with and without the 529 accounts. If you have a low income and no other assets, yes, he might qualify for FA in future years. If you have a high income or other assets, it might not make any difference.
  • jamgolfjamgolf Registered User Posts: 70 Junior Member
    Thanks everyone. So, it does not seem there is anything fundamentally flawed with approach (B). At worst it might not make any difference and in best case scenario there is some small chance that it might help a little bit.
  • BelknapPointBelknapPoint Registered User Posts: 3,889 Senior Member
    At worst it might not make any difference...

    At worst it might have an unfavorable effect on future need-based aid. I'll say it again -- it depends on the individual circumstances of each student and the student's family. Unless you want to present here all of your family's financial information and options for paying college expenses (definitely not recommended), nobody on this forum can give you specific advice that is properly tailored to your situation.
  • twoinanddonetwoinanddone Registered User Posts: 19,540 Senior Member
    The only thing I can think of is that if the schools costs $50k for one year, you would not take the $5500 loan that year. If you don't take it, you can't go back and take it in a later year.

    So in year 2, where is the $50k going to come from?
  • JBSeattleJBSeattle Registered User Posts: 408 Member
    The OP may have just given a theoretical example. I will likely be in a similar situation with (hopefully) a bit lower college cost. In years 1 and 2 I was going to do a similar strategy for schools were I think there is some hope on aid. Out of cash glow in those years I was going to aggressively pay down a HELOC. Then use cash flow and HELOC to pay for college in years 3 and 4 with hopefully a little more aid. I know this is not precise but I don’t even know where my D is going so it is just an educated guess right now.
  • privateIDprivateID Registered User Posts: 259 Junior Member
    edited December 6
    I'm a bit confused. Maybe a small example will help. Two cases:

    1) Use the whole $50K from college savings in year 1. The $50K from college savings will not count against aid in future years.

    2) Don't use the whole $50K in year 1. You will need take the money from somewhere else. Let's say you have $100K sitting int he bank. If you took the money out of the bank, then you would have less assets from the bank savings to count against future aid.

    The net of both situations is the same. If you spend $50K from any assets (college savings or any savings), you ll have $50K less assets to be considered for future financial aid. However, in case 2 the money will grow tax-deffered a bit longer. So that is the better choice from my perspective.
  • jamgolfjamgolf Registered User Posts: 70 Junior Member
    If there is lots of other funding sitting in some other accounts e.g. parent's savings, checking or investment accounts etc. then it makes no difference whether the funds from educational accounts are used in the first year or spread over time. In fact, it makes more sense to probably use them, later on, i.e. allow them to grow tax-free as @privateID said.

    But if there are no other significant liquid assets in parent's savings, checking or investment accounts, then exhausting the educational savings first can possibly qualify the student for some aid in years 2,3,4.

  • blossomblossom Registered User Posts: 9,072 Senior Member
    OP- what is the money currently invested in? There were a lot of folks in 2007 whose payment plans went out the window after the market pulled back (and 1987, etc.) As your kid gets older, you need to balance your desire to have the funds fully invested and growing tax free with your need for liquidity, the timeframe for recovery in a market pullback, etc.
  • thumper1thumper1 Registered User Posts: 72,248 Senior Member
    edited December 6
    The most confusing part of this for many is that financial aid is for an academic year, example...fall 2019 to June 2020.

    Your taxes are for the calendar year....so in the academic year above...Part would be 2019 tax year and Part would be 2020 tax year.

    So...need based aid...for example...could be different for January to June....and Sept to December...because these are different academic years...and that is the timeline for financial aid awards.

    This could affect how you draw on those accounts.
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