529 Plan Payments

 

Based on the tax consequences associated with 529 plans, if the student’s account balance is zero at the time payment is received from a 529 plan the check can be processed as a deposit for a future term or returned to the issuer.  Typically, there are several options for withdrawals and the distributions are reported different to the IRS based on type (Beneficiary or Account Owner’s SSN):

  1. Qualified withdrawal to the participant/account owner
  2. Qualified withdrawal to the beneficiary/student

  3. Qualified withdrawal to am eligible college or university

  4. Nonqualified withdrawal to the participant

Qualified higher education expenses include: The costs of tuition, fees, books, supplies and equipment required for enrollment or attendance, certain room and board expenses of a Designated Beneficiary at an Eligible Institution of Higher Education, expenses for the purchase of computer or peripheral equipment (as defined in Section 168(i)(2)(B) of the Code), computer software (as defined in Section 197(e)(3)(B) of the Code), or Internet access and related services, if such equipment, software, or services are to be used primarily by the Designated Beneficiary during any of the years the Designated Beneficiary is enrolled at an Eligible Institution of Higher Education, and expenses for special needs services in the case of a special needs beneficiary that are incurred in connection with enrollment or attendance at an Eligible Institution of Higher Education.

 

     • Room and board expenses – Room and board expenses are eligible expenses only if the Designated Beneficiary is enrolled in a degree or certificate-granting program at least half-time. For students living at home with parents, as well as students not living in institutionally owned or operated housing, the Eligible Institution of Higher Education “cost of attendance” allowance for federal financial aid purposes will be the room and board amount treated as a qualified higher education expense. For students living on campus or off campus in institutionally owned or operated housing, the amount of room and board treated as a qualified higher education expense can be the actual amount charged to the student.      

      • Tax treatment – Qualified withdrawals, including any earnings, will not be subject to federal taxes. (For state tax treatment, please check with your local state government.) Participants should retain adequate records relating to withdrawals for tax reporting purposes. If the distribution is made directly to the Eligible Institution of Higher Education, the Designated Beneficiary is treated as the distributee for tax purposes.    

 

 

Non-qualified withdrawals: Withdrawals other than qualified withdrawals or withdrawals due to the death or disability of the Designated Beneficiary or receipt of a qualified scholarship or attendance at a U.S. military academy by the Designated Beneficiary.

    • Tax treatment – The earnings portion of a nonqualified withdrawal is subject to applicable federal and state income tax and a 10% additional tax imposed by federal tax law. Participants should retain adequate records relating to withdrawals for tax reporting purposes.  

   

  

Non-qualified withdrawals with exceptions: Exceptions to the 10% additional tax imposed for non-qualified withdrawals include the death or disability of the Designated Beneficiary; the receipt of a scholarship by the Designated Beneficiary, to the extent the amount withdrawn does not exceed the amount of such scholarship; the attendance by the Designated Beneficiary at a U.S. military academy; or the use of the American Opportunity tax credit (which modifies the prior Hope Scholarship tax credit) or Lifetime Learning tax credit as allowed under federal income tax law.