529 Plan Distribution Options

Paul Miloe, CRPS®

529 Plan Distribution Options

With several schools back in session and others starting soon, many parents are setting budgets for private tuition and college. Those who funded 529 plans have the accumulated funds as an available resource, but most aren’t totally clear on how they can be used. 529 funds can be used for “qualified higher education expenses,” up to $10K of pre-college tuition expenses, or a once in lifetime $10K payment for student loan debt. In general, to maximize tax-deferral and to save funds for what’s typically the largest expense, avoiding the use of 529 funds prior to college is wise. In terms of which college expenses are “qualified,” the IRS has a formal list you should check, but core items like tuition, fees, books, required supplies, and room and board are included.

Room and board is one area of confusion. Regardless of on or off-campus living, students must be enrolled at least half-time to have these expenses deemed qualified. For students living on campus, these expenses should be covered if they’re within the room and board budget set by the college. When a student lives off campus, things get more complex. Items like rent, utilities, and food can still be qualified, but limitations apply. To check, you must find the allowance that the related university publishes on their Cost of Attendance summary. Expenses incurred off campus cannot exceed the published allowance.

When having 529 plan funds distributed, there are typically three options the account holder may request. The first is to have the check sent to them as the owner if the plan is parent-owned. 529s are technically reimbursement plans, so parents often make payments to the school and then reimburse themselves from the 529. In this scenario, the 1099Q tax form would be issued under the parent’s SSN and sent to them. The second option is to make the check payable to the beneficiary (student) for the expenses they’ve incurred and the 1099Q would then come under their SSN and be sent to them. The final option is for a direct payment to the school. This requires a bit more work but can be done. For payments made to the school, the 1099Q is issued in the name of the beneficiary (student).

If need-based financial aid is being considered, things get more complex. When 529 assets are owned by a parent (or student claimed as a dependent), funds within the 529 count as a parent asset when filing a FAFSA, but distributions do not affect things. Parent assets can reduce aid by 5.64%. If a student is independent for tax purposes, then assets in the plan are considered a student asset, but distributions are also not considered in the aid formula. Student assets can reduce aid by 20%. Finally, in the case of a 529 owned by a grandparent (or anyone not covered above), the assets in the 529 are not included on the FAFSA, but any distribution is considered as income to the beneficiary (student) and can count against them up to 50% of the amount withdrawn in the aid formula.

Proper planning on the timing, use of funds, who will receive the funds, and how financial aid can be affected are all factors to carefully consider prior to moving on a 529 plan distribution. We’re here to help, so please let us know if you have a question.

Investors should consider the investment objectives, risks, charges, and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state’s 529 Plan. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

Paul Miloe

CRPS®

Paul Miloe has been actively working as a financial advisor with Albitz/Miloe & Associates, Inc. since 1996. He graduated from University of California, Santa Barbara in 1994 with a Bachelor of Science degree. Paul is a Chartered Retirement Plans SpecialistSM. His focus centers on personal and retirement planning, life insurance, annuities, college savings plans, and senior issues, including long-term care insurance. In addition to his role as CCO of our firm, Paul is also a Branch Manager for Cetera Advisor Networks, LLC (member FINRA/SIPC). Paul, and his wife, Mary, are lifelong residents of the South Bay, and along with their two children, and are active in their community via sports, school, and community service.

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