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When I withdraw funds from a 529 plan, can the distribution be made to my account (parent) or to my daughter's account or must it be made directly to the school or apartment complex?
Most 529 plans give you a choice when it comes time to take distributions. You can direct the payment to the account owner (you), to your beneficiary or to the school. (In many 529 plans, a payment to the school will be made co-payable to the beneficiary.)
If the distribution comes to you, the 529 plan will report the distribution to you (and to the IRS) on Form 1099-Q. If it goes to your beneficiary or to the school, the 1099-Q goes to the beneficiary.
What difference does it make who receives the 1099-Q? Usually none, provided your beneficiary incurs sufficient qualified higher education expenses, thus keeping the distributions tax-free. However, if any portion of the distribution is taxable due to an insufficient amount of qualified expenses, the choice of recipient will make a difference.
For example, let's assume your daughter receives a $10,000 tax-free scholarship for college. You can request a distribution from your 529 plan to the extent of the scholarship without incurring the 10-percent penalty normally assessed on "nonqualified" withdrawals.
However, the earnings paid out with the distribution will be subject to federal income tax. If you request the distribution go to your daughter, she will pay tax on those earnings at her tax rate (which for most college students is very low). If you take the distribution, the earnings portion of the distribution is taxable at your rate.
Of course, if the distribution goes to your daughter, she will have the money. You might suggest she invest it for the future and not use it to fund spring break in Mexico for herself and 10 of her best friends.
Many parents and grandparents using 529 plans will request that the distributions go straight to the school. It's easy to do, and it ensures that the expenses are paid in the same year as the distributions, which is important for tax purposes.
However, before taking this route, make certain the school's financial aid office does not use the check received from the 529 plan as a reason to reduce a financial aid package. If it appears that might happen, you may be better off paying the school with your own funds and requesting the distribution from the 529 plan be made to you or your beneficiary in reimbursement of those payments. Just be sure you match up the payments to the school and the distributions from the 529 plan within the same calendar year to avoid problems with the IRS.
Regarding your daughter's apartment complex, it would be unusual to find a 529 plan willing to make the distribution payable to a third-party vendor such as a landlord. However, to the extent her room and board constitutes a qualified higher education expense, the distributions you or your daughter receive from the 529 plan will remain tax-free.
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