From Savings to School: Navigating the 529 Plan Withdrawal Process with Ease

If you've been saving diligently for your child's education using a 529 plan, congratulations! You're now ready to put those funds to good use. At Paidly, we understand that the withdrawal process can seem overwhelming, so we've created this friendly guide to help you navigate the 529 withdrawal rules and make the most of your savings.

Calculating Your Qualified Education Expenses

Before you begin withdrawing funds from your 529 plan, it's important to calculate your qualified education expenses. These include:

• Tuition and fees
• Room and board (if enrolled at least half-time)
• Books, supplies, and equipment required for enrollment
• Computer technology, related equipment, and internet access

Keep in mind that expenses such as transportation, health insurance, and personal expenses do not qualify for 529 withdrawals.

Timing Your Withdrawals

To avoid penalties, be sure to withdraw funds from your 529 plan in the same calendar year that you incur the qualified education expenses. Coordinate your withdrawals with your payment deadlines to ensure you have the funds when you need them.

Completing a Withdrawal Request

To withdraw money from your 529 plan, simply complete a withdrawal request form with your plan provider. This can usually be done online, by phone, or by mail. Have your documentation of qualified expenses, such as tuition bills or receipts for required textbooks, ready to provide.

Important 529 Withdrawal Rules

• Withdrawals for non-qualified expenses are subject to income tax and a 10% penalty on the earnings portion of the withdrawal.

• You can withdraw funds tax-free for qualifying expenses at any eligible educational institution, including colleges, universities, vocational schools, and other post-secondary institutions.

• If you receive a refund from the educational institution, you must recontribute the funds to your 529 plan within 60 days to avoid taxes and penalties.

Don't Wait Until the Last Minute

When requesting a withdrawal from your 529 plan, remember that bank transfers typically take 3-5 business days. To ensure you meet your payment deadlines, submit your withdrawal request well in advance.

What Happens to Leftover Funds After Graduation?

If you have leftover funds in a 529 plan account after your beneficiary graduates or decides not to go to college, you have several options:

• Use the money to make student loan payments.
• Roll over the funds to a Roth IRA (starting in 2024, subject to certain conditions and limitations).
• Liquidate the account and pay income tax and a 10% penalty on the earnings.
• Keep the funds in the account for graduate school, or continuing education.
• Change the beneficiary to a qualifying family member who will use the funds for college.
• Save the funds for a future grandchild.

How Much Can I Withdraw Each Year?

If your child is in college, there is no annual limit on how much you can withdraw from your 529 plan, as long as the funds are used for qualified education expenses. For private school expenses for children in grades K-12, you can withdraw up to $10,000 tax-free per year for qualified education expenses.

You can withdraw from your 529 plan at any time. However, it's crucial to ensure that you use your withdrawals for that year's qualified expenses and that you withdraw your funds at the right time to align with when you'll be using them.

What Happens if I Use 529 Plan Withdrawals for Non-Qualified Expenses?

If you use 529 plan withdrawals for non-qualified expenses, you'll have to pay income tax and a 10% penalty on the earnings portion of the withdrawal. The principal portion, which represents your original contributions, will not be subject to taxes or penalties.

Empowering Employers to Boost College Savings

While navigating the 529 plan withdrawal process, it's important to remember that there are other ways to support your child's education and reduce the burden of student loans. Employers who offer student loan repayment benefits, like those provided by Paidly, can make a significant impact on your child's financial future. By allowing employers to contribute directly to their employees' children's 529 plans, Paidly helps families save more for college and reduces the need for excessive student loan borrowing.

We hope this guide has helped clarify the 529 withdrawal process and rules. If you have any further questions, don't hesitate to reach out to your plan provider or a financial advisor for personalized guidance.

If you are starting late on your savings for college, be sure to check out our Late to Save? 529 Plan Strategies for Parents article in the series.

If you're an employer looking to support your employees' financial well-being and help them save for their children's education, talk to an expert at Paidly to learn more about our innovative 529 plan contribution solutions.