Yes, @2014novamom - please impart your experience wisdom!!! Us newbies need it 
529 plan withdrawals are only tax free if they are used for “qualified expenses.” Things like transportation, health insurance, fraternity dues, etc. are not qualified expenses. We use our 529 plans to pay for everything related to college so the portion of any money withdrawn that is used to pay for nonqualified expenses and designated “earnings” rather than principal is subject to income tax in addition to a 10% penalty. Since we parents are in a much higher tax bracket than our kids we have the checks made out to them so that it is their income and not ours.
Also note that you can withdraw an amount equal to any scholarship received and that is not a taxable event. DS gets a $22K annually merit scholarship from Case and if we didn’t withdraw that scholarship money he would have a significant surplus in his 529. Technically the lump sum withdrawal of that surplus at the end would not be subject to taxes but we prefer to just do it on an annual basis to make it a cleaner transaction. We contribute the max to a Roth IRA for him and the rest is in an investment account.
DD did not get any merit aid from Syracuse so she will have very little left (if any) in her 529 when she graduates.
@MinnieFan Oh my I went through the rollercoaster of emotions with you reading through the past few pages of posts. I’m so incredibly relieved that everything is turning out for the best.
My daughter just got an email to schedule an interview for the World Scholars Program at University of Delaware. It’s an invitation only program that is basically an international based education (doing two+ study abroad semesters starting first semester Freshman Year) as well as a special mentoring program, special on campus housing and lots of other cool opportunities, symposias etc. It’s a very unique program and one of the things that she liked about UDel. Unfortunately she still has not received any merit despite most other kids getting their merit within 2 weeks of acceptance (she was accepted in early November to the University and on 11/16 to the Honors College). We’re a bit curious if World Scholars was the reason for the delay and seeing that she’s getting an interview makes it seem the likely culprit. Exciting stuff…despite her first love being Pitt…she plans to follow this path a bit to see where it leads.
Regarding Miami University Ohio…any other CC parents heading to one of the Honors and Scholars weekends? My daughter is debating scheduling that now as well since we’ve heard they really roll out the red carpet.
Actually 529 scholarship withdrawals are taxable, but do not incur the 10% penalty for other non-QEE withdrawals. Of course only the earnings are taxed, not the original investment. So in the case of a scholarship withdrawal the 529 becomes like any other after-tax mutual fund investment for tax treatment. The only fully non-taxable 529 withdrawals are funds used to pay QEE.
D just got accepted to McGill!!
Happy for her as she has some very good options and still waiting on a few more. This will make the days leading up to May 1 that much more interesting!
Best of luck to those still waiting and congrats to all the excellent acceptances so far - a very talented group of kids!
But for most people (students not receiving big merit or financial aid), the QEE is the vast bulk of the money that is being spent. For instance, I plan on using a 529 to pay all of my D’s tuition bill and room/board bill directly to the college, and all of that is not subject to taxes. I also plan on buying her books and a computer out of the 529, and these are also not subject to taxes, but I honestly don’t know how to pay the books/computer out of the 529 without creating a hassle proving what this money was spent on. Does anyone know the answer to this?
@2014novamom I thought it was interesting how your family chose to pay ALL college costs and expenses from the 529, regardless of whether it was a Qualified Educational Expense. It’s so interesting to see how different families handle things. Thanks for the clarification.
@MinnieFan what a wild, exhausting ride. Glad it worked out and lesson learned. These are the things of my nightmares
@AmyBeth68 I cannot convince my son to take Miami seriously right now. My husband and I are loving the $$ and opportunities—every day we seem to get a new letter/email. They really throw out a big welcome. I think in 2 weeks once we know if any other reachy merit schools are going to happen, we will discuss it again. I’m expecting to know if we can keep 2-4 schools on his list by February 1. If not, Miami moves up.
Near as I can tell, you just save the receipts. Take the withdrawal from the 529 in the same calendar year. It would probably be easiest if you make the purchase transaction ONLY include required books (don’t throw in a pack of gum!) and make a withdrawal in that exact amount to match. You could combine withdrawals and track subtotals on receipts, but it would be easier to track and prove, if necessary, if you keep the accounting simple.
Also, you need to be sure only to include required items. The computer cannot be paid via 529 unless it is required by the school. The books must be required too. Supplemental books don’t count, even if you use them for the class.
Oops! I was wrong here. This rule was changed recently. Computers DON’T have to be required by the school in order to be a qualified educational expense.
@booajo Maybe a Make it Miami day would help sway him, if you live close enough for that to be feasible. I hear that seals the deal for a lot of kids. We are going March 9.
Thanks @daffodilpetunia!
I was also curious about the mechanics of how you do this, and saw an article on Quora which said,
"THE MECHANICS OF A 529 WITHDRAWAL
This depends on the type of plan, state sponsor, and plan administrator. Not every plan allows distributions to the same recipient or even in the same way. For example, if you want to send rent to your landlord on a regular basis directly from the plan: Some plans allow this, others don’t. Some plans take longer to actually disburse a check or transfer assets. Others will have more stringent requirements due to their interpretation of AML (anti-money laundering) requirements. State laws will vary. So every plan works different for these and a multitude of other reasons.
But here’s how it works mechanically:
- Complete a distribution request either online, complete a form, or call to request a disbursement directly from the 529 plan
- Select your method of distribution: Have a check sent to you/the beneficiary/the school/third-party as allowed, have a deposit made directly into a specific account, or directly to a school (as available or permitted)
That’s really all there is to it. It will take varying lengths of time for the actual disbursement to happen, because usually the investment you selected will need to be liquidated, but otherwise the transfer happens pretty quickly so long as your account is up-to-date. If you have to change an address or bank information, this can delay the process."
The article went on to say that you need to keep your receipts in the event you get audited, which is unlikely from the federal government but more likely from the state and even more likely (but still not too likely) by the plan administrator (like Fidelity). I wish they had used a different example than paying rent to a landlord because I think that’s one of those tricky areas. I think you can use a 529 plan without creating a tax issue to pay your full-time student’s off-campus housing expense provided that the expense is equal to or less than what you would have paid the college for the dorm room, but I’d be very careful with this one and look at the rules extremely carefully for this.
@gclsports @AmyBeth68 We are about 500 miles away, so not a quick jaunt. And our time is very very limited. It is still on MY list though.
My 529 account has options to send it to the school or the beneficiary. So for books and computers, I expect I’ll send the money to my daughter directly from the 529 account and then have her buy the items. For books, I think she’ll need to buy them first and then we’ll reimburse her, to get the numbers right.
We also have a Coverdell account, so that’s another thing I need to figure out. I don’t think it has these nice options to send it directly to the school in an easy way.
DS interviewed today for Singletary scholarship at UK. He felt really good about everything went, so we will keep our fingers crossed. Last year they only selected 20 Singletary Scholars, which is a tiny, tiny fraction of their applicant pool. Still there wasn’t a ton of pressure, because we are anticipating he will get the Patterson scholarship for NMF, same financially.
U of L isn’t off the list completely, but more and more momentum for UK. In his words over 90% that he is going to be a Wildcat rather than a Cardinal. For now though he is still going to wait on Brown and GEMS at U of L, which don’t have interviews until late February. This whole process is just playing out way to slow for my taste! One step at a time I guess.
In another weird twist he has already been assigned a room and roommate at U of L. Oh and he got his last acceptance today from Centre College, which is off his list now so not much emotion here over it, other than the good feelings that come from going 4 for 4.
@daffodilpetunia We have Coverdell ESA accounts. We generally have to request a distribution, they send us a check in DD name, she deposits it and then pays tuition. The whole process takes about 1.5 - 2 weeks. There has been no direct pay option that I have been able to uncover. And the distribution has to be for the exact amount (or under) of tuition. So you have to wait ntil the school sends the bill, which is usually about 3-4 weeks before a semester.
@MinnieFan, what a roller coaster ride of emotions. Literally teared up twice while reading. That is my S to a ‘T’ and I refuse to do everything for him, but live in near panic that pieces won’t get followed up on.
I also can’t get him to do smaller local independent scholarships. I’ve explained that we’ll reduce any potential loans he has to take, but he still won’t get involved!
@melvin123 We are doing it that way because we have a deal with the kids. Whatever is left over from the 529 (and other college savings) is theirs to keep. Gives them an incentive to choose a lower cost school or find merit money (we do not qualify for need based aid) and to keep other out of pocket expenses low (e.g., buying used books/renting vs buying new, choosing not to have a car on campus to save on parking fees, etc.). This keeps the accounting clean. DS will have a nice surplus. DD, not so much. But each made their choice with full knowledge of how the finances would shake out in the end.
Speaking of renting books – make sure you document the state of the books when you receive them and let the vendor know of any issues. DS once had a book rejected at return because of a damaged spine even though he received it that way. Of course, DS did not document that and had to eat the cost of purchasing the book (albeit at the used price).
Financially, things have been pretty simple here. Well, as simple as they can be. The biggest hurdle for me, personally, was filling out the FAFSA (no CSS, thankfully).
I don’t have much in a 529 - early on Ohio stopped the pre-paid tuition plan, and after that we decided to save in other vehicles. So that’ll be gone sooner rather than later. I need to figure out how to actually get it from the 529 to the college, but that should be straightforward.
I was selected for verification. Sent all that stuff off to current #1 school. They also said I could send other school awards in to see if they could match anything, so I did. That was a few weeks ago, so I don’t expect to hear anything back soon. This was, in my opinion, a really good package. Not free - that would be even better! - but manageable.
Some schools have sent letters asking for verification information before they send financial packages. Since they are no longer on the list, I haven’t done that. Waiting on the last two schools - one for admission and one for admission to the program - so I could be sending information to them.
One school sent a letter saying “hey, we’ll pay for your books!” Great, right? Except posters are saying it’s going to be added into tuition (it’s a new thing) so the students really are paying. I guess I should have known that one, but still. A little disingenuous.
Otherwise, plugging away at local/regional scholarships. And surviving physics. 8-}
@melvin123 check to see if you qualify for AOTC.
https://www.irs.gov/credits-deductions/individuals/aotc
If you do, then you could pay all QEE for 529 with 529 money, except for $4,000 of tuition, that way you could get up to $2,500 in AOTC.