Withdrawals 101

When it comes time to use your Bright Start 529 account to pay for qualified higher-education expenses, you will need to start making withdrawals. Understanding the following information below can help you do so properly.

Criterion

  • Qualified Expenses: 529 withdrawals used for qualified expenses are tax free. Qualified expenses include tuition and fees, room and board, and other educational costs, such as textbooks and certain other required school fees, supplies or equipment. If you use money in the account for other purpose
  • If Your Child Receives a Scholarship: You can withdraw from your 529 account in an amount up to or equal to any scholarships that the account beneficiary receives without incurring the 10% federal tax penalty. However, you will owe federal and state income taxes on what you withdraw from the earnings portion. Another option is to leave the assets in the account and change the beneficiary to another eligible family member. Ask your tax advisor who would qualify.
  • Leftover Money: Consider naming a new beneficiary in the family, or simply leaving the money to potentially grow tax-free possibly for your child's future graduate school tuition or even your own educational goals.

Process

  • Qualified Withdrawals: The amounts withdrawn must be sent (i) in the form of a check directly to the Eligible Educational Institution, (ii) in the form of a check directly to a vendor, (iii) in the form of a check payable to both the Beneficiary and the Eligible Educational Institution, or (iv) in the form of a check payable to the Account Owner or the Beneficiay, as payment for Qualified Higher Education Expenses.
  • Non-Qualified Withdrawals: You will pay federal and possibly state income taxes on investment earnings withdrawn as a Non-Qualified Withdrawal, as well as an additional federal tax of 10% of such investment earnings withdrawn as a Non-Qualified Withdrawal, unless you qualify for an exception to the additional tax.
  • Timing: Be sure you withdraw money from the account in the same tax year you need to pay for a qualified expense, or you may face a taxable distribution and possible penalties—even if the expenses are qualified.

Please consult your tax professional if you have any questions or need more information.

IRS Publication 970, Tax Benefits for Education is a good additional source of information.

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