Paying for college

rocketman08
Sun, 20 Jul 2008 13:49:23 +0000

Why do we have to transfer directly to college account to avoid taxes?
The money invested in 529 is after tax money… therefore, we don’ owe any tax (on interest earned) on it as long as we use it for college.



I don’t know if that’s a requirement in law, but you do need to demonstrate on your taxes that the money was used for educational expenses (as there are very stiff penalties if the money is used for anything else). It could just be a recommendation to avoid further paperwork later (to show where the money went). If it’s transfered right to the school then the investment company can vouch for that… if they just send you a cheque then you have to demonstrate that you didn’t use the money for something else… and that means more paperwork.