Finding the right distribution strategy
Learn about CollegeBound 529
Families have a lot of questions about the best way to save for college when their children are young. And when high school graduation arrives, so does a whole new list of questions about the best way to use those savings.
How can you get the most out of your 529 account withdrawals?
Your 529 account administrator may offer an online service that allows you to choose the university, and will send the money to the university on your behalf, but some parents prefer to receive a check that they can then apply toward applicable costs.
What are the steps to withdrawing money to pay for my child's college education?The first step to withdrawing money from your child's 529 account is determining whether the funds will be sent directly to your child's school or if they will be transferred to you instead.
Next, total your child's qualified higher education expenses for the year — in other words, the costs that your 529 plan will cover.1
- Student activity fees
- Room and board
- Lab supplies
Non-qualified expenses include transportation to and from the school, medical insurance and mobile phones.1 Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state and local taxes.
Your child is the beneficiary of two 529 accounts. What's the best distribution strategy to get the most out of both?
In general, withdrawing funds from the 529 account that has risen the most in value can provide the greatest tax savings. However, students who are also receiving financial aid have additional considerations to keep in mind. That's because parent contributions and other family contributions differ when it comes to need-based financial aid calculations.
Expected Family ContributionThe government uses a formula to calculate your Expected Family Contribution (EFC), the amount of money that it expects you to contribute to college expenses. The EFC treats assets and income differently for parent-owned and grandparent-owned 529s. As a result, contributions from grandparents may count as income to your child, negatively impacting their financial aid status for the first two years they apply for aid (assuming they are on track to graduate in four years).
For this reason, grandparents may prefer to transfer ownership of the 529 accounts they maintain to the beneficiaries' parents. Alternatively, since FAFSAs can now be filed using tax returns from two years ago, a student could tap parent-owned accounts for their first two years of college, then take distributions from grandparent-owned accounts to pay for their junior and senior year expenses.2
Your child earned a full scholarship to college. What should you do with the funds in her 529 account?
Whether your child decided not to pursue a higher education or received a full ride to the school of their choice, you may find yourself with unused funds in your child's 529 account. If your child received a scholarship, you can withdraw up to the total amount of the tax-free scholarship from his or her 529 account without incurring the 10% penalty — though you will still have to pay income taxes on the earnings you withdraw.
In any case, there are plenty of other ways to put leftover funds to use without incurring a non-qualified withdrawal penalty.
Distribution strategy options
|One option is to simply change your account beneficiary to another member of your family, such as the original beneficiary's sibling or a niece, nephew or cousin.|
|You can even designate yourself as the new account beneficiary and use the funds you've saved to earn your own degree, or simply to take classes that interest you.|
|Alternatively, you can leave the funds you've accumulated in your account as a gift for your future grandchildren, letting you secure your legacy while the money you've saved continues to grow tax-free.|
For more information visit irs.gov.
Learn the advantages of CollegeBound 529.
1 See irs.gov for the full list of qualified and non-qualified expenses.
2 See studentaid.ed.gov for changes to the FAFSA® process for 2017-18.
Invesco Distributors, Inc., nor any of their applicable affiliates provide legal or tax advice. This information is provided for general educational purposes only and is not to be considered legal or tax advice. Investors should consult with their legal or tax advisors for personalized assistance, including information regarding any specific state law requirements.