Dear Abe,
Greater than $1,000. When you take money out of a Section 529 plan to pay qualified educational expenses, all of the money distributed has to go toward the expenses to get the tax benefit. The breakdown you get from the plan is useful in computing your taxes because it's the investment earnings that are free of federal income taxes.
The plan is required to provide you with a Form 1099-Q, Payments from Qualified Education Programs, from each of the plans from which you received a 529 plan distribution in a tax year. The form should be sent to you by Jan. 31.
The contributions were taxed on the way into the account. They're not taxed on the way out. You still need to spend the contributions when distributed for qualified educational expenses to get the tax break on the investment earnings used for qualified expenses. If you withdraw more than the qualified expenses, the excess is considered a nonqualified distribution. If you take the money out and don't spend it on qualified distributions, the distribution will be taxed. In general, taxable distributions also are subject to a 10 percent penalty tax on the amount included as taxable income.
To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all 529 plan distributions for the tax year to the adjusted qualified education expenses.
With a child in college myself, I'm having a hard time figuring out why you feel the need to try to finesse distributions out of the 529 plan for anything other than qualified expenses for your two college students. Don't try to game the IRS on this one.
Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.
Ask the adviser
To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.
Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.