For those of you out there sending your children off to college for the first time or the last, saying goodbye never gets easier and paying the bills isn’t exactly a picnic either.  If you’ve managed to place funds aside in a 529 Plan for education, now is the time to collect up Qualified Higher Education Expenses (QHEE) and reap the rewards of saving. We get many questions regarding 529s from our clients and friends, but there are three in particular that pop up most frequently.

What college expenses can my 529 dollars cover?

The IRS defines “Qualified Higher Education Expenses” (QHEE) as, “amounts paid for tuition, fees and other related expense for an eligible student that are required for enrollment or attendance at an eligible educational institution” (see link below). Notice this language does not mention anything about a laptop computer or optional extracurricular activities. While those things may (or may not) be covered, it’s important to do your research on the matter and be certain you are only expensing items that meet the QHEE definition. Room and board is a great example. If your child is living off-campus, only a cost comparable to on-campus housing may be considered QHEE. And no, despite having lots of great documentaries, a subscription to Netflix is not a QHEE.

Can I withdraw funds at any time as long as I have the proper documentation for the expense?

The IRS website says you must pay the QHEE during the tax year or in the first three months of the next tax year. In addition to simplifying your tax return, this requirement also prevents you from theoretically accumulating tax-deferred 529 dollars indefinitely.

A great article on the subject from Fidelity’s website confirms this. “It’s important that withdrawals you take from your 529 college savings account match with the payment of qualifying expenses in the same tax year.” This can be tricky if you receive the spring semester bill in December. See below for the link to the Fidelity article.

What if I started a 529 for my grandchild but my daughter has a separate account for him as well?

Colleges have tricky rules on funding sources when it comes to determining financial aid for the student. It’s possible that funds from a grandparent’s 529 account will be counted as income for the student and could alter his/her eligibility for certain financial aid offers. It’s important to understand these rules and coordinate with all 529 account owners to determine the optimal funding/withdrawal strategies. 

529 Savings Plans can be great vehicles to help save for college. However, navigating the withdrawal criteria can be complex and frustrating. We recommend reading up on the subject using the links below and consulting with your financial advisor and tax professional to ensure you are well-equipped.

IRS: https://www.irs.gov/publications/p970/ch08.html​        https://www.irs.gov/individuals/qualified-ed-expenses

Fidelity: https://www.fidelity.com/viewpoints/personal-finance/college-529-spending

Saving For College: http://www.savingforcollege.com