5 Blunders by First-time 529 Plan Spenders

You may be done with the hard part -- saving for college using a 529 plan. But that doesn't mean your job is finished. When using 529 monies for the first time, you'll want to avoid these common blunders, some of which could affect your taxes. "I've had more calls this year about 529s maybe than I ever have," says Jeffrey L. Cisco, director of student accounts for Capital University, a private institution in Columbus, Ohio. "(There's) just confusion as to how (account holders) interact with the 529 the first time using it." Blunder 1: Assuming the school can access the account "The families don't seem to be reading how the 529s work," says Cisco, past president of the Ohio Bursars Association, referring to information that is provided by schools and 529 plans. "They think that they just tell me they're on a 529 plan and that we'll draw down the funds without them requesting them." Instead, families have to contact the 529 plan and request the funds, which can be used for tuition, required books, supplies, mandatory fees, computer purchases, Internet access (only in 2010), and some room and board. "They think it's going to be automatic," says Margaret Partyka, bursar for the University of North Florida in Jacksonville, Fla. The funds typically can be withdrawn in three ways: payable to the school, payable to the beneficiary (who uses the money to pay bills) or payable to the account owner. Your 529 plan will give you information about how to make a withdrawal. "As the custodian or the owner take money out of the plan as needed, they will go directly to the [529 plan] to request the withdrawal of the funds," says Cary Lipman, a first vice president with SunTrust Investment Services. Joe Hurley, founder of Savingforcollege.com, adds that a potential issue arises when plan holders have the withdrawal paid directly to the school. It can trigger a financial aid adjustment that would not happen if you simply paid the school with your own funds and reimbursed yourself with a withdrawal from your 529, he says. The problem stems from how schools view the 529 payment. Some schools may incorrectly receive that check and treat it like a scholarship (for federal financial aid purposes), which is not correct, Hurley says. Depending on the particular school's policy, others may treat it as an adjustment for school-based aid to the student, which is the school's choice. Blunder 2: Failing to specify the amount to withdraw Some parents believe the schools have the authority to withdraw the exact tuition amounts from their accounts, says Partyka. Instead, account owners have to specify the amount that is being used to cover tuition and other college costs. Partyka says it's always worth asking school officials if you have questions. Even you have used 529 funds to pay for costs at one school, different policies at other colleges and universities could mean a change in logistics and procedures if your child switches schools. Parents also need to think about whether their 529 plan is being used to pay 100 percent of qualifying college costs. When preparing your tax return, you might find that your total costs have to be adjusted downward because you or the student is claiming an education tax credit, Hurley says. The American Opportunity Credit gives a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year, according to the IRS. Instead, withdraw only the "net" qualifying costs from your 529 or include some of the 529 funds on the student's tax return, Hurley says. Blunder 3: Withdrawing funds in the wrong calendar year Hurley says this can easily happen in the second semester, when the bill comes in December. If it gets paid in December, be sure to withdraw from your 529 in this calendar year. If it gets paid in January, then withdraw from your 529 in the next calendar year. If it is in the wrong year, you will have a mismatch between total withdrawals and total expenses when filing your taxes. Hurley adds that this is not a problem if you have the 529 withdrawal paid directly to the school, because it will make the withdrawal in the correct calendar year. Blunder 4: Failing to leave time for a fund transfer Cisco has had parents call his office a day or two before the tuition deadline saying they are planning to use 529 funds, without realizing it may take two weeks to get them. "There is a processing time. It's not like you're going in and doing an electronic checkout of your savings account," he says. Blunder 5: Having too many people withdraw funds If grandparents, family members or friends have set up 529 plans for your child, Hurley advises planning a withdrawal strategy ahead of time. Have a discussion with them to make sure the qualifying college costs are divvied up. Posted October 1, 2010 You may be done with the hard part -- saving for college using a 529 plan. But that doesn't mean your job is finished. When using 529 monies for the first time, you'll want to avoid these common blunders, some of which could affect your taxes. "I've had more calls this year about 529s maybe than I ever have," says Jeffrey L. Cisco, director of student accounts for Capital University, a private institution in Columbus, Ohio. "(There's) just confusion as to how (account holders) interact with the 529 the first time using it." Blunder 1: Assuming the school can access the account "The families don't seem to be reading how the 529s work," says Cisco, past president of the Ohio Bursars Association, referring to information that is provided by schools and 529 plans. "They think that they just tell me they're on a 529 plan and that we'll draw down the funds without them requesting them." Instead, families have to contact the 529 plan and request the funds, which can be used for tuition, required books, supplies, mandatory fees, computer purchases, Internet access (only in 2010), and some room and board. "They think it's going to be automatic," says Margaret Partyka, bursar for the University of North Florida in Jacksonville, Fla. The funds typically can be withdrawn in three ways: payable to the school, payable to the beneficiary (who uses the money to pay bills) or payable to the account owner. Your 529 plan will give you information about how to make a withdrawal. "As the custodian or the owner take money out of the plan as needed, they will go directly to the [529 plan] to request the withdrawal of the funds," says Cary Lipman, a first vice president with SunTrust Investment Services. Joe Hurley, founder of Savingforcollege.com, adds that a potential issue arises when plan holders have the withdrawal paid directly to the school. It can trigger a financial aid adjustment that would not happen if you simply paid the school with your own funds and reimbursed yourself with a withdrawal from your 529, he says. The problem stems from how schools view the 529 payment. Some schools may incorrectly receive that check and treat it like a scholarship (for federal financial aid purposes), which is not correct, Hurley says. Depending on the particular school's policy, others may treat it as an adjustment for school-based aid to the student, which is the school's choice. Blunder 2: Failing to specify the amount to withdraw Some parents believe the schools have the authority to withdraw the exact tuition amounts from their accounts, says Partyka. Instead, account owners have to specify the amount that is being used to cover tuition and other college costs. Partyka says it's always worth asking school officials if you have questions. Even you have used 529 funds to pay for costs at one school, different policies at other colleges and universities could mean a change in logistics and procedures if your child switches schools. Parents also need to think about whether their 529 plan is being used to pay 100 percent of qualifying college costs. When preparing your tax return, you might find that your total costs have to be adjusted downward because you or the student is claiming an education tax credit, Hurley says. The American Opportunity Credit gives a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year, according to the IRS. Instead, withdraw only the "net" qualifying costs from your 529 or include some of the 529 funds on the student's tax return, Hurley says. Blunder 3: Withdrawing funds in the wrong calendar year Hurley says this can easily happen in the second semester, when the bill comes in December. If it gets paid in December, be sure to withdraw from your 529 in this calendar year. If it gets paid in January, then withdraw from your 529 in the next calendar year. If it is in the wrong year, you will have a mismatch between total withdrawals and total expenses when filing your taxes. Hurley adds that this is not a problem if you have the 529 withdrawal paid directly to the school, because it will make the withdrawal in the correct calendar year. Blunder 4: Failing to leave time for a fund transfer Cisco has had parents call his office a day or two before the tuition deadline saying they are planning to use 529 funds, without realizing it may take two weeks to get them. "There is a processing time. It's not like you're going in and doing an electronic checkout of your savings account," he says. Blunder 5: Having too many people withdraw funds If grandparents, family members or friends have set up 529 plans for your child, Hurley advises planning a withdrawal strategy ahead of time. Have a discussion with them to make sure the qualifying college costs are divvied up. Posted October 1, 2010