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Avoid these 529 withdrawal traps

Avoid these 529 withdrawal traps

3. Taking the money in the wrong year.

Although you will not find this rule explicitly stated anywhere in the IRS' publications or tax forms, the withdrawals you take from your 529 account must match up with the payment of qualifying expenses in the same tax year. If you withdraw the 529 money in December for a tuition bill that isn't paid until January, you risk not having enough QHEE during the year of withdrawal.

You can ensure proper matching by requesting that the distribution from the 529 plan be sent directly to the school bursar.

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4. Requesting payment be made directly to the school.

Didn't we just suggest that you request your 529 distribution be made directly to the school to ensure proper matching? Then why would we now say this is a mistake?

Requesting the payment directly to the school could be a mistake if you are not sure how the school treats the 529 money in its financial-aid process. Schools often receive checks for outside scholarships won by their students, and they will typically reduce the student's federal and school-based grants by an equivalent amount.

You would not want the school viewing the 529 money the same way it views a scholarship and reducing your child's financial-aid package. Check with the school first and confirm its policy with respect to funds received directly from a 529 plan. You always have the option to request the distribution be made payable to you or your student. It then becomes your responsibility to pay the school.

The best way to withdraw 529 funds

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