Cook Wealth Management Group

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.)

Content derived from information provided by the IRS and “4 Things to Know About 529 Plan Withdrawals” by Bill Bischoff. SmartMoney. June 8, 2010.