Generally speaking, you don’t want to have money left over in your 529 account once your child graduates from college. The good news is that if the non-qualified distribution is caused by the tax-credit adjustment described above, the 10% penalty is waived. If you discover the excess 529 withdrawal after year-end, there’s not much you can do about it. If you are outside the 60-day window, but within the same calendar year, you can look to prepay next year’s expenses to increase this year’s QHEE. What can you do if you receive a distribution check from your 529 plan only to discover after speaking with your accountant that you’ve taken too much? If you are still within the 60-day rollover window, you can take the excess and roll it into a different 529 plan so that amount is no longer treated as a distribution, provided you have not rolled over that child’s 529 account within the prior 12 months. For example, if you claim a $2,500 American Opportunity credit on a federal tax return you must remove from QHEE the $4,000 in tuition and related expenses that was used to support the credit. You must remove from your total QHEE any of the tuition expense that is used to generate an American Opportunity tax credit or a Lifetime Learning credit. This happens because of the coordination rules (aka anti-double-dipping rules) surrounding the various education tax incentives. Wondering how your 529 plan may impact financial aid? Use our Financial Aid Calculator to estimate the expected family contribution (EFC) and your financial need.Įven if you’ve properly accounted for all qualifying expenses, and withdraw from your 529 account only enough to pay for those expenses, you may end up with a non-qualified distribution. If the student is living in campus-owned dormitories, the amount you can include in QHEE is the amount the college charges for its room and board. If your student is living off campus, ask the financial aid department for the room and board allowance for students living at home with parents, or living elsewhere off campus, as the case may be. Room and board costs in excess of the amount the college includes in its “cost of attendance” figures for federal financial aid purposes.Insurance, sports or club activity fees, and many other types of fees that may be charged to your students but are not required as a condition of enrollment.You CANNOT include the following college expenses: Since January 1, 2018, qualified expenses also include up to $10,000 in tuition expenses at private, public or religious elementary, middle and high schools (per year, per beneficiary). For students who are pursuing a degree on at least a half-time basis, QHEE also includes a limited amount of room and board. You can also use money from a 529 account to pay student loans. QHEE includes tuition, fees, books, supplies, computers and related equipment, and the additional expenses of a “special needs” beneficiary. The principal portion of your 529 withdrawal is not subject to tax or penalty. You or your beneficiary - you get to choose who receives the money - will have to report taxable income and pay a 10% federal penalty tax on the earnings portion of the non-qualified distribution. If you withdraw more than the QHEE, the excess is a non-qualified distribution. Taking too much money.ĥ29 withdrawals are tax-free to the extent your child (or other account beneficiary) incurs qualified education expenses (QHEE) during the year. Here are six mistakes you’ll want to avoid: 1. But once you’ve entered the “529 withdrawal phase”, be sure you make the right decisions when tapping your 529 account. You’ve got money set aside for just this very occasion. It’s a good thing you’ve been saving for college with a 529 plan. Before he or she even meets their professors, you will have received the first of many tuition bills from the college bursar’s office. Your son or daughter has finally graduated from high school and soon will be heading off to college.
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