Qualified spending is the key to 529 plans


Are you a parent thinking about how to pay for your children’s college? Should you consider a 529 plan? Named after Section 529 of the Internal Revenue Code, a 529 plan offers the opportunity to save for the university in a tax-efficient manner. But you have to be careful, because the tax benefits disappear if the savings are not used to pay for eligible education expenses (EQE).

The best resource is IRS publication 970 (tinyurl.com/u5f34pdc), which gives detailed details of qualified tuition programs, aka 529 plans. It describes EQAs as “expenses required for the designated beneficiary’s enrollment or attendance at an eligible educational institution”. A subset of QEE, Qualified Higher Education Expenditure (QHEE), is “related to enrollment or attendance at a qualifying post-secondary school.”

Perhaps a more user-friendly resource is a Fidelity article, “How to Spend From a 529 College Plan,” at tinyurl.com/n2rbx7s. Fidelity, one of the largest asset managers in the world, is the program manager of the Connecticut 529 program called CHET (Connecticut Higher Education Trust).

I wish it were easier, but the expenses can be a bit complicated. The key is knowing how to avoid a tax or penalty and keep the receipts.

According to Fidelity, the following expenses would be eligible, but there are limits: tuition and related fees; books and supplies; computers and related equipment; room and board; and the repayment of student loans. Room and board limits, for example, have to do with whether the child is enrolled half the time or more, whether the amount is “included in the school’s tuition for aid calculations. financial “and what is” the actual amount charged if the student lives in accommodation managed by the educational institution. “

If your child is planning to live off campus, you need to take this a step further. If the accommodation is “not owned or operated by the college, you cannot claim more than the school’s estimates for accommodation and meals to attend,” according to Fidelity. This means that some homework is necessary: ​​parents will need to know in advance the cost of room and meals from the college financial aid office.

As for the books, only those which are compulsory reading for the lessons count. When it comes to computers, as you can guess, “computer software for sports, games, or entertainment would be excluded unless the software was primarily educational in nature,” according to Fidelity.

Bottom line: Keep track of QHEE separately from other expenses. Keep a copy of published room and board charges, etc., if your children live off campus. Keep any document justifying the expense as a QHEE.

Regarding tax reporting, Rita Assaf, vice president of retirement and college leadership at Fidelity, explained that 529 account owners “receive an annual Form 1099-Q when they have withdrawn a distribution from their account and must report these expenses to the IRS in their annual taxes. “

She emphasized the need to keep records and receipts to document that the money was spent on eligible educational expenses for the recipient.

The purpose of keeping receipts is to justify the expenses if challenged by the IRS. As the Fidelity article points out, “If your withdrawals are greater than your QHEE, taxes, and possibly a penalty, will be payable on income that exceeds your qualifying expenses.”

The timing of your withdrawals is also important because they relate to a particular tax year. As Fidelity notes, “It is important that the withdrawals you make from your 529 savings account match the payment of qualifying expenses in the same tax year.” While this sounds like a straightforward concept, delays resulting from issues such as processing payments from a 529 account or through the school, or delayed payments in the mail, could cause issues. One solution to avoid delays: Make payments electronically (which colleges often prefer) from a bank or brokerage account, then repay yourself from account 529.

Next week, let’s talk about additional college resources.

Julie Jason, JD, LLM, personal fund manager (Jackson, Grant of Stamford) and author, welcomes your questions / comments (reader[email protected]). Its awards include the 2020 Clarion Award, symbolizing excellence in clear and concise communications. Her latest book, a curated collection of Julie’s Columns, is titled “Safe Retirement: An Insight into Money Management from an Award-Winning Financial Columnist”. To hear Julie speak, visit juliejason.com/events.

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