After years of saving money in a 529 plan, it’s now time to put those funds to use and pay your first college tuition bill.
But, before you withdraw money from your 529 college savings plan, you’ll want to understand how the process works to help ensure you don’t lose out on any potential tax benefits or run into an issue that delays the withdrawal.
To help get you started in the process, here are some critical decisions you’ll need to make.
Who to Pay
Generally, the 529 plan administrator will let you decide how to distribute your funds to cover college expenses.
Most 529 plans offer online self-service tools where owners can simply log in and select who they want to pay.
There are three main options for paying the distribution:
- To the account owner
- To the beneficiary
- Directly to the college or other eligible educational institution
A few plans will let you make a payment to a third party, such as a landlord of an off-campus apartment.
The distribution recipient does not affect a qualified distribution’s tax-free status. These are tax-free withdrawals when the funds are used for qualified higher education expenses, including tuition.
However, the distribution recipient does affect the IRS’s tax treatment of a non-qualified withdrawal. This occurs when you use 529 plan funds for non-qualified expenses. The earnings portion of a non-qualified distribution to the beneficiary or the college is taxed at the beneficiary’s rate. In contrast, distributions to the account owner are taxed at the account owner’s rate.
How to Pay
Once you’ve decided where to send your 529 funds, the next step is to select the payment type. Most plans offer two options: make an ACH deposit to your bank account or have a check printed and mailed.
Some 529 plans allow account owners to make electronic payments directly to the college towards paying tuition expenses. This avoids a multi-step process where the account owner must deposit the money to their bank account and then mail a check to the college or do an ACH transfer from their bank account to the college.
Electronic payments may also save account owners both time and money. Many parents wait to withdraw 529 funds until they receive a tuition bill, which can cut it close if you mail a check to the bursar’s office. It can take two or three days to deliver a check, but it can sometimes take a whole week. This can be an issue when schools won’t let students register for classes until their bill is paid, so many parents end up paying additional fees to have the payment check sent overnight through FedEx or UPS.
Issues to Avoid
If you know you will need to make a distribution, you can save yourself some trouble by checking your account to ensure its information is up-to-date. Last-minute changes can result in delays to withdrawals.
For example, requesting an address change may put a temporary hold on the account due to fraud prevention measures. The hold duration is designed to allow sufficient time for the account owner to receive notification that a change was made and, if it were fraud, to notify the appropriate parties.
An account hold is designed to protect the account owner and the assets in the account. However, legitimate account changes can still trigger these safety measures depending on the plan, so call ahead to make sure you don’t encounter any issues when it comes time to make your withdrawal.
When to Pay
Tuition due dates depend on the school, but your fall tuition will likely be due in late July or August, and spring tuition in December or January. But that doesn’t mean you must wait until your bill is due to withdraw money from your 529 plan.
If you plan to take your distribution as a check or ACH deposit, you can take the money out once you know how much you’ll need and have it ready to go once the bill arrives. Just ensure your plan withdrawals are taken in the same calendar year as you’ve paid the qualified education expenses. Otherwise, they will be considered non-qualified withdrawals, and you may owe a penalty and tax on the earnings portion.
Several colleges also allow installment payments over the academic year, often for a small up-front fee. These colleges may allow or require the payments to be made through ACH, avoiding the need to send multiple checks through the mail.