<p>Well, I am no CPA, but I can read as well as one, so here we go:</p>
<p>1: The IRS wisdom on the subject
[Publication</a> 970 (2007), Tax Benefits for Education](<a href=“http://www.irs.gov/publications/p970/index.html]Publication”>http://www.irs.gov/publications/p970/index.html)
The most interesting part is Chapter 8
[Publication</a> 970 (2007), Tax Benefits for Education](<a href=“http://www.irs.gov/publications/p970/ch08.html]Publication”>http://www.irs.gov/publications/p970/ch08.html)</p>
<p>2: More specifically, answer to the question “Are distributions taxable”
[Publication</a> 970 (2007), Tax Benefits for Education](<a href=“http://www.irs.gov/publications/p970/ch08.html#d0e9822]Publication”>http://www.irs.gov/publications/p970/ch08.html#d0e9822)</p>
<ol>
<li>Figuring out the taxable portion of the distribution
[Publication</a> 970 (2007), Tax Benefits for Education](<a href=“http://www.irs.gov/publications/p970/ch08.html#d0e9854]Publication”>http://www.irs.gov/publications/p970/ch08.html#d0e9854)</li>
</ol>
<p>Note that this only discusses the amount of the distribution and the amount of education expenses. It does not specify the means of the distribution. A central premise of American law is that everything that is not expressly forbidden is allowed, hence the conclusion of all of the above is that the distribution method does not matter, as long as you can document the amount of qualified education expenses, and the 529 distribution does not exceed the qualified expenses.</p>
<p>Here is another opinion on the subject, not as official as the IRS’
[Decide</a> where to distribute 529 funds](<a href=“Bankrate: Guiding you through life's financial journey”>Bankrate: Guiding you through life's financial journey)</p>
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<p>Hope this helps, don’t blame me if you choose to take this advice as gospel and the IRS comes after you. There are clearly situations where the distribution is taxable (e.g., if your child got a full tuition scholarship), in which case it matters A LOT who receives the distribution. In the latter case I would either have the 529 rolled over to a younger sibling, or deposit it straight in the USC account. At the end of each semester the account will end up with a surplus, and your child can get a check from USC for the surplus amount. They will then be taxed, usually at a 15% rate, on the surplus. If immediate access to the money is required, it can be deposited directly into the student’s bank account, with the same tax consequences.</p>