Gary W. Pelletier, CLU, ChFC, AIF®

Northeast Planning Associates, Inc.

Corporate, Estate

& Financial Planning


529 Plans – The Distribution Side

| May 31, 2016
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Whether you have a graduating senior going off to college in a few months or you are planning college visits this summer, you may have begun to consider what you need to do in order to realize the full benefit of your 529 College Savings Plan.

There are two circumstances of which you should be aware:

  1. Once distributions from the 529 plan are made, if the total qualified expenses are equal to or more than the distributions from the 529 plan, there is not much to do except hold on to the receipts for qualified higher education expenses of the beneficiary for that year. These include tuition, mandatory fees, required books, supplies and equipment as well as a capped portion of room and board for those beneficiaries enrolled at least half-time. If the distribution doesn’t exceed the amount of the student's qualifying expenses then none of the distribution is reported on the tax return - the benefit of 529 Plans!
  2. If the distribution exceeds qualified expenses, then the earnings on the excess is reported as "other income" on the tax return and will be seen as taxable. There may also be a 10% additional tax applied to this amount, except in the cases of death, disability, or inclusion due to receipt of scholarships or grants.

Form 1099-Q is used to report distributions from a 529 plan for tax time. This form goes to the owner or beneficiary of the 529 plan. In the first case, no reporting is needed and the 1099-Q is simply kept for your records. Tax reporting is only needed when a portion of the 529 distribution is taxable. The IRS also receives Form 1099-Q for the year that the distribution is made. For this reason it is important that distribution amounts for a calendar year match the expenses for the same year.

What if, after paying all qualified expenses for a beneficiary there is still money remaining in the 529 plan? First, this is not the worst problem to have. Saving too much is rarely a bad thing. The neat feature of a 529 plan is that beneficiaries can be changed to family members, including children, nieces, nephews and (future) grandchildren. As a result of these accounts having no maturity or deadline of funds being distributed, other family and even future generations can benefit by excess savings.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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