The cap and gown have been ordered, the caterer booked and the invitations sent. As you prepare to celebrate one of your child’s biggest achievements to date – high school graduation – you can’t help but think about what will come next. After years of saving money in a 529 plan, it will soon be time to put those funds to use and pay your first college tuition bill.
But, before you withdraw money from your 529 plan, you’ll want to make sure you understand how the process works to help ensure you don’t lose out on any potential tax benefits, or worse, run into an issue that delays the withdrawal itself.
To help get you started in the process, here are some key decisions you’ll need to make.
Who to Pay
Generally, 529 plans will let you decide how you want your funds distributed.
Most 529 plans offer online self-service tools where owners can simply log in and select who they would like to pay.
There are three main options for paying the distribution:
- To the account owner
- To the beneficiary
- Directly to the college
A few plans will let you make a payment to a third-party, such as a landlord of an off-campus apartment.
The recipient of a distribution does not affect the tax-free status of a qualified distribution. However, the recipient of a distribution does affect the tax treatment of a non-qualified distribution. The earnings portion of a non-qualified distribution to the beneficiary or to the college is taxed at the beneficiary’s rate, while distributions to the account owner are taxed at the account owner’s rate.
How to Pay
Once you’ve decided on where to send your 529 funds, the next step is to select the type of payment. The majority of plans offer two options – you can 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. 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 be cutting it close if you’re mailing a check to the bursar’s office. It can take two or three days to deliver a check, but 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’re going to need to make a distribution, you can save yourself some trouble by checking your account to make sure its information is up-to-date. Last-minute changes can result in delays to withdrawals. For example, if you request an address change it may put a temporary hold on the account due to fraud prevention measures. The duration of the hold 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 have to 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 make sure your plan withdrawals are taken in the same year as the qualified expenses are paid.
A number of colleges also allow payments to be made in installments over the course of 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.
[Originally published on April 14, 2016. Last updated on July 29, 2020.]