Your daughter will be starting college in the fall, and she has $9,000 of qualified education expenses for 2017 (match up the calendar year, not the academic year). After 10 years of compounding, the account now has about $20,000 and half of it is principal and the other half is earnings. For simplicity's sake, let's say you funded the account with $10,000 and didn't make any further contributions. Here's an example: Let's say you opened a 529 college savings account in 2007 for your daughter. The resulting figure is your adjusted qualified educational expense. This doesn't include gifts or inheritances. This includes tax-free scholarships and fellowship grants, veteran's assistance, the tax-free portion of the Pell Grant, employer-provided educational assistance, and any other tax-free assistance. Be sure to subtract the amount of any tax-free educational assistance. However, you will still owe taxes on the earnings portion of the overdistribution.Īdd qualified expenses: tuition and fees, books and supplies, and housing. If your child receives a scholarship, the 10% penalty on a nonqualified withdrawal is waived up to the amount of the scholarship. It's important to figure this number accurately, lest you will owe taxes-and possibly a 10% penalty-on the overdistribution, or the portion of the distribution in excess of QEE. If your student is planning to live off campus, it's a good idea to call the campus housing department and confirm the qualified housing costs amount when you're calculating your QEE.Ĭalculate Your QEE Per the IRS, taxes do not have to be paid on the contributed amount (as 529s are funded with aftertax dollars) and generally aren't owed on any earnings distributed from a 529 if the total distribution is less than or equal to adjusted qualified education expenses. That means off-campus housing is considered a 529-eligible expense, but only to the extent that it doesn't exceed the greater of the two aforementioned amounts. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. The allowance for room and board that was included in the cost of attendance determined by the college or university.Ģ. The student must be enrolled at least half time in the institution, and the room and board expenses can't exceed the greater of these two amounts:ġ. The technology, equipment, or services qualify if they are used primarily by the beneficiary of the plan during the years the beneficiary is enrolled at the college or university. This includes the cost of any computer technology, related equipment, and/or related services such as Internet access. But before you do that, you need to know what is and isn't covered. Know What's Covered You'll need to calculate your qualified education expenses. If you figure the amount correctly, though, no tax or penalty will be due. You'll need to figure in tax-free educational assistance such as scholarships and grants and also factor in the impact of credits, such as the American Opportunity Tax Credit or the Lifetime Learning Credit.Īny amount you withdraw in excess of qualified expenses will be subject to taxes on the earnings portion of the withdrawal, and could incur a 10% penalty. The key is that is that in any tax year (not academic year), you want to ensure that the amount you withdraw from the 529 college savings plan doesn't exceed your qualified education expenses. Taking money out of your 529 plan seems like it should be the easy part, but if you don't carefully right-size your 529 plan distributions, you may find that you owe both a penalty and extra taxes.
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