Is a 529 Distribution Really Tax-Free?
Need to withdraw from a 529? If you don’t calculate correctly, you may owe taxes on your distribution. To make sure the total distribution is actually tax-free…
Time It Right
Make the withdrawal in the same calendar year that the educational expenses are paid
Crunch The Numbers
Calculate using this formula:
+ Tuition and related fees + room and board + books and supplies + computer and internet costs
– Pell Grants – tax free scholarships – fellowships – tuition discounts – any costs used to claim the American Opportunity or Lifetime Learning tax credit
= distribution amount
If your withdrawal is in excess of the above calculation, part of the earnings will be subject to tax and possibly a penalty.
Don’t Forget…
- You may have the withdrawal check made out to either the account beneficiary or the account owner.
- You may roll over the account tax free to another Qualified Tuition Program for the benefit of the same beneficiary or for the benefit of a family member of the beneficiary (including spouse).
If you’re a client, please feel free contact us for assistance with your 529 distribution calculation or your 1099-Q (Payments from Qualified Education Programs).
Interested in setting up a 529 Plan? Remember the beneficiary must be enrolled in an eligible educational institution at least half time. (Find out which schools are eligible here.)