Best way to make first 529 withdrawals?

I’ve read so many articles as I get ready to start withdrawing from the 529 I am the current owner on (transferred from late grandmother) which my S22 is the beneficiary of, but they all give conflicting advice. Some even say not to have the 529 pay the school directly, and I’ve read some threads where that is advised based on some non-QE’s charged, etc.

Aside from the tuition/housing bill that won’t come for a little while yet, if I want to reimburse for say, the registration fee and a computer we buy for him, what is the best way to do this? He just turned 18 and I want to get him set up with a new checking account at his school, and a student CC. I’m trying to wrap my head around what kind of reimbursement loop we should have if I pay for a 529 QE, and then have it disbursed to him as beneficiary. Do you guys then have the student send the money back to you? If I’m joint on his checking account, then I’ll get a tax form too, right?

I do keep very meticulous records and every disbursement would be qualified and well-accounted for. I’m just looking for a good order of operations as to avoid an IRS headache even though I know I could back up my claims.

What we did was to keep meticulous records, keep the copy of the bills that we paid, and pay the bills out of our checking account (either by check, or more often by direct transfer). Then somewhere between the end of the semester and the end of the year (a small window for the fall semester) we called the 529 folks and had the money either transferred to our checking account or sent to us by check. For costs that were out of the country (one daughter went to university in Canada) we also printed out the Google currency conversion in US dollars for what we paid in Canadian dollars.

We never had the money sent directly from the 529 fund to the university. Mostly this was just because we never took the time to figure out how to do it.

One university specifically required that students have a laptop, and listed on their web site which two choices of computer they recommended that we choose from. From what we read this seemed to make it obviously valid to use 529 money to buy the computer.

I am pretty sure that we took less out of the 529 than we were permitted to take out by forgetting to count a few valid expenses. Also one daughter seriously under-ran the budget leaving quite a bit in her 529. However, the other daughter is using up the left over money in a graduate program. 529 funds can be transferred from one sibling to another. Of course it takes the wisdom of Solomon to figure out the fair way to adjust for this.

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Thanks! I did actually redistribute money amongst my 3 kids when my mom died so that they would have all had equal contributions. But I’m not going to mess around moving funds between them now unless I have to because it did require some paperwork if I remember correctly.

Do you think it makes much of a difference if the distribution comes to me vs. my son? I know we’d get different tax forms, and his would be less “questioned.”

Also I should have added, we filed no FAFSA/CSS and don’t expect an education credit. He’s never filed his own tax return so planning for that eventuality is still hard to visualize from a tax-efficient perspective.

What is the reason for this? That’s what I am planning to do for D22. The only issue I see is that the 529 financial institution sends the check to the college by mail.

@BelknapPoint do you have any suggestions here?

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Here’s one article Tips on Spending the Money in College Savings Accounts - The New York Times

" Financial advisers differ on whether families should withdraw funds themselves and then pay the college, or have the 529 plan pay the college directly.

Melissa Sotudeh, a financial planner near Washington, D.C., said having the college paid directly from the 529 made it clear that the funds were used for educational expenses.

“You want to make sure your paper trail is as clean as possible,” she said. “Paying the school directly is just super clean.”

Others, however, suggest that families or students should receive the funds first and then pay the school themselves to avoid any potential confusion about how the funds are classified. Mark Kantrowitz, publisher of Savingforcollege.com, said in an email that it was possible that some colleges might misinterpret direct payments from a 529 account as “cash support,” which could reduce a student’s financial aid eligibility."

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Unless your 529 provider is seriously messed up - it makes absolutely no difference.
In NJ, the 529 is managed by Franklin Templeton - each disbursement you choose whether the plan OWNER’s or the plan BENEFICIARY’s SSN should be referenced in the year-end tax documents.

Either way you’ll have to keep records to document that any disbursement was used for qualified higher education expenses. The amount to the school will have to match the control document they issue at year end.

Naturally, the assumption is that the school would only bill you qualified expenses, so there’s no reason not to pay them directly.

I guess the simplest way for me to put it is, assuming all expenses are qualified and appropriately documented, how big of a deal is it if I get the tax form vs. my son? So many articles spook me out about my SSN being attached to anything because of IRS eyebrows.

We have always had our 529 payments sent directly to the schools (to the extent they were qualified expenses that were owed to the school). Our 529 plan has options to have amounts distributed directly to the owner or the beneficiary or the school. Checks are cut to the school. My kids’ colleges had specific addresses to which 529 funds were to be sent. Grad school for one of them sent a notice earlier this year indicating they will now be accepting electronic 529 distributions. Will need to look at that in the fall.

Timing could sometimes be an issue. One college was good with timing due dates to allow for 529 payments to be made clearly in the same year as the applicable semester. Other wasn’t as good with that (tuition for winter was due in early January so getting check cut and having tuition arrive on time both in same year was something of a challenge).

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It took me one phone call (at a college not known for operating efficiency) to get the dates of my “due by” bill shifted. Do not assume that the timing won’t match until you make a phone call! I thought for sure I’d need to make that call every semester but no- once the very nice representative at the Bursar’s office made the change in my kid’s account, the charges posted/were due by the agreed upon date every single semester.

Make the phone call before you assume!!!

We’ve been using 529s for 5 years now (2 kids so far) and have never had any tax problems with having the reimbursements sent to me, the parent. There are also times when I have the 529 funds sent directly to my child (rent, for example); again, no problems. So for your example, the college registration fee would have been paid from my checking account, and lets say I put the laptop on my credit card. I would then make the 529 request and have it sent to me. Just keep records in case anything is questioned down the line; it never has been for us.

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Never assume everyone’s experience will be the same as yours. I made said phone call and was told to pound salt. And I get that. Schools set up their policies and procedures and then people want rules changed for them because they are special. Seems entitled to me. But hey, just an opinion. To each his/her own.

It doesn’t matter who the cheque is made out to, but since your child is a dependent you should have all disbursements being classified for the OWNER (you) not the beneficiary (your child). This way the expenses and reimbursements will wash out under your SSN, which is also where you’d take any credits.

Those details will likely not matter to most until it triggers an audit, however low those odds are.

I recall being surprised how unsophisticated the 529 withdraws were with my oldest. Even back then I was expecting some debit card or something that kept records of the education use. But nothing. We just created a spreadsheet where we track every education expense with description and every withdrawal and show how they equal. With our oldest it was academic because the college correctly reported the full amount minus the books and no one troubled us. With the second kid, the college annoying only recorded tuition and not room and board on their tax docs to the IRS inquired and we showed them the spreadsheet and that satisfied them. I asked the second college why they misreported it and the said they do it based on the minimum college plan – not 529’s – that don’t allow room and board.

To keep it easy, we pay the colleges out of our regular accounts, then reimburse ourselves from the college account. IRS doesn’t mind as long as it totals right.

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Depending on your processor the choice of payee has nothing to do with the year end reporting. As long as for each disbursement you can pick if it is reported under the beneficiary vs the account owner.

No, the 529 amount to the school will not have to match the “control document” (you mean the 1098-T issued by the school, right?). The 1098-T may very well include expenses that are not 529 qualified (like a student health fee) and not include expenses that are 529 qualified (like room and board).

This is a bad assumption, as explained above.

My experience has been the same as blossom’s. The published college payment deadline for spring semesters was very early in the year, and I wanted to withdraw from the 529 in the same calendar/tax year as the semester being paid. The college had no problem with allowing payment a week or so after the official deadline. The accounts receivable folks at the college clearly had prior experience with this kind of request for this reason. They were very nice and didn’t make me feel like I was coming across as an entitled parent who felt he was worthy of special treatment.

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Huh? The child’s tax dependency status shouldn’t be a factor here. The 529 distribution can be made to the student, reported under the student’s SSN, and a parent can still take any eligible education tax credits.

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I think the reason is timing. If you have the 529 fund send it to the school, you are relying on the 529 to send it on a specific day, and for the college to post it on a day, and for nothing to be delayed in the mail. I like more control.

I just paid my daughter’s tuition for the summer (due tomorrow) and I sent the ACH last Thursday. I saw that it was transferred from her account to mine (she’s in Europe right now, on the trip that these funds are paying for), and I saw that the bill was paid last Friday to the school. Monday was a holiday and I just didn’t want any delays.

I’d worry about the spring payment being applied in Dec and not Jan, or missing a deadline and being charged a late fee (or worse, my daughter being dropped from a class.

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If you are annoyed that the 1098-T didn’t report room and board, be annoyed at the IRS, not the college. The IRS decides what can and cannot be reported on the 1098-T. The 1098-T is designed to help taxpayers claim the education tax credits, and room and board is not a qualified expense for the tax credits, while room and board is a qualified expense for 529 purposes, as long as the student is enrolled at least half-time.