Navigating 529 Plan Withdrawals: Rules and Guidelines

Navigating 529 Plan Withdrawals: Rules and Guidelines

With the return to college just around the corner – or the start of a new chapter for some – it’s a great time to revisit the uses and withdrawal mechanisms for a 529 account, also known by the IRS as a Qualified Tuition Program (QTP).

We’ve previously discussed the benefits of putting money into a 529 plan. You can open it years in advance to start saving for your child, grandchild, or any other beneficiary’s future educational needs. The funds deposited into these accounts grow tax-deferred and when used for qualified education expenses, it remains tax-free. As you approach the time to utilize these funds, there are a few important considerations to keep in mind.

Eligible Uses:

• Higher Education: 529 funds can be used for colleges, universities, graduate schools, apprenticeship programs, and technical/vocational schools. For these options, there are no minimum or maximum withdrawal limits.
• K-12 Tuition: For public, private, or religious schools, you can withdraw up to $10,000 per year, per beneficiary, across all 529 accounts for K-12 tuition. To be federally tax-free, withdrawals must not exceed this limit. Any excess may be considered nonqualified, with associated earnings potentially subject to taxes and penalties.

Before use, be sure to check with your school or program for 529 participation (FSA Eligible Schools)

You can withdraw funds from your 529 education savings account at any time and in any amount. However, to maintain tax benefits, withdrawals must be used for qualified education expenses, including tuition, fees, room and board, books, supplies, electronics, and other materials directly related to education.

While you don’t need to provide receipts for qualified expenses, the IRS expects taxpayers to maintain accurate records in case of an audit. Here is a detailed outline from the IRS on what constitutes Qualified Higher Education Expenses: IRS Qualified Higher Education Expenses .

Withdrawing from your 529  

When withdrawing from a 529 account, you must request funds within the same calendar year that the qualified expenses occur and are paid. While different 529 custodians may offer different withdrawal options, they generally adhere to similar guidelines. For those utilizing an Alaska 529 Plan, some of the a list of withdrawal options can be found here: Alaska 529 Withdrawals

Options for Unused 529 Savings

Options Without Tax Consequences:

• Change the Beneficiary: You can change the beneficiary to an eligible family member.
• Retain Savings for Future Expenses: Keep the funds in the account for future educational expenses, such as graduate school.
• Roll Over to a Beneficiary-Owned Roth IRA: You may request a rollover of unused 529 savings into a Roth IRA for the same account beneficiary. This can be done using a rollover form, which is usually available on your 529 custodian’s website, such as the Rollover to Roth IRA Form from Alaska 529. There are specific rules for this option:
  • The 529 account must have been maintained for at least 15 years.
  • Only contributions (and their earnings) made more than five years prior can be rolled over.
  • The rollover amount each year cannot exceed the IRA contribution limit, with an aggregate limit of $35,000.
  • If you have questions about your specific situation, please speak with a tax professional.

Option With a Tax Consequence:

• Request a Nonqualified Withdrawal: Earnings from a withdrawal not used for qualified expenses may be subject to income taxes and a 10% federal penalty.

In conclusion, being aware of the rules and guidelines of 529 plan withdrawals is important to maximizing the benefits of your savings. By understanding the eligible uses and withdrawal options, you can ensure that your funds are used effectively and in compliance with IRS regulations. Whether you’re covering immediate education expenses or planning for future needs, a 529 plan offers flexibility and tax advantages that make it a powerful tool in funding education. Remember to keep accurate records, stay informed about your options, and consult with a tax professional if needed to make the most of your 529 savings.

Derek Stone

Associate Financial Advisor

Alaska Wealth Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2, which is available upon request. Material presented has been derived from sources considered to be reliable, but accuracy and completeness cannot be guaranteed.

Note: This material should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.