No. 4 - How do you go about counting your qualified higher education expenses?

http://www.savingforcollege.com/articles/no-4---how-do-you-go-about-counting-your-qualified-higher-education-expenses

I would like to make a withdrawal from my 529 plan for qualified expenses I incurred in 2002 before I set up the account. Any idea if this is acceptable to the IRS? Thanks! - "Jermar" Answer: Should be no problem, Jermar. The IRS does not require that your withdrawal be traceable to specific educational expenditures. Instead, think of the taxation of 529 withdrawals as a two-step process: Step 1 is to throw all of the beneficiary's qualified higher education expenses (QHEE) for the year into one "bucket." Step 2 is to throw all 529 withdrawals into a second bucket. Then, compare this withdrawal bucket to the QHEE bucket. As long as the withdrawal bucket is smaller, you don't have to worry about federal income tax. The withdrawn earnings are tax-free. What happens if the withdrawal bucket is bigger than the QHEE bucket? Well, that's when you have to go to Step 3: calculating how much of the earnings portion of your withdrawal is taxable, and, possibly, subject to a 10% federal penalty. The IRS last month (November 2002) came out with Publication 970 containing instructions. You, or the beneficiary, will have to use these instructions to compute the amount of income subject to tax and penalty when preparing 2002 income taxes. Although direct tracing is not required, I believe it's still important to match up your 529 plan withdrawals and college expenditures within the same calendar year. If you pay a bill on December 26 and request a withdrawal from your 529 plan that is not processed until next January, I think you may have a tax problem. Publication 970, although helpful in answering many questions, does not confirm or deny my reading of the tax law regarding this particular issue.