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Why You Must Document Money Spent from 529 College Savings Plans

August 9th, 2012 · No Comments · Taxes

by Staff

As I blogged a couple of months ago, 529 plans are a great way to save tax-free money for college. The only stipulation is that any money withdrawn from the plan must go toward “qualifying” college-related expenses. And while administrators generally don’t ask you for proof of how you’re spending the money, you are required to note its use. That said, hold on to your documentation, just in case.

As reported by Kiplinger, “Come tax time, you’ll get a 1099Q form from the plan reporting the distribution, and it’s up to you to determine how much, if any, is taxable. (If all the money went for qualified expenses, it’s all tax-free.) You should keep the documentation of the qualifying expenses in your tax files in case of an audit.”

There are two types of 529 plans:

1) Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board.

2) College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses.

College expenses covered under the tax-free 529 plan include:

  • Tuition
  • Room and board (including off-campus living provided the student is enrolled at least half-time)
  • Books
  • Fees
  • Supplies
  • Required equipment
“Most 529 plans permit qualified withdrawals to either the account owner, the beneficiary or the school” reports Kiplinger, “so you could withdraw the money yourself and then write a check to the school, or you may be able to pay the school with the 529 money directly.”

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