When to withdraw 529 money

Kiplinger's Personal Finance

Q: My son is a freshman in college, and this is our first time using 529 money for his college bills. Do we need to withdraw money from his 529 for his 2018 tuition bills and other eligible expenses by Dec. 31, or do we have a few months afterward to withdraw the money?

A: You have to withdraw the money for 2018 expenses by Dec. 31, 2018. “The expense and the distribution must be in the same year,” says Mark Kantrowitz, of Savingforcollege.com.

This is a good time to consider all of the eligible 529 expenses you’ve paid during the year, so that you will have time to make the withdrawals before Dec. 31. You can withdraw 529 money tax-free for tuition, fees, and required books and supplies, as well as for room and board.

Students who are enrolled at least half-time can even use 529 money tax-free to pay rent for an off-campus apartment (up to the school’s allowance for room and board, which you can find at the school’s website under the cost of attendance or by contacting the financial aid office). You can also withdraw money tax-free from the 529 if you bought a computer for your son this year.

Keep in mind that you can’t withdraw money tax-free from the 529 now for next year’s expenses unless you’re billed for them this year. This timing is different from the rules for the American Opportunity Credit that allows you to prepay for expenses that will occur during the first three months of the year and still take the credit.

“There is no similar language for 529 plans,” says Kantrowitz. (For more information about the American Opportunity Credit, see IRS Publication 970.)

If you’re still contributing to a 529, it’s also a good time to find out whether you need to make contributions by the end of the year in order to deduct your contribution on your state income taxes for 2018.

Most states set a Dec. 31 deadline, but Georgia, Mississippi, Oklahoma, Oregon, South Carolina and Wisconsin give you until April 15, 2019 (and Iowa gives you until May 1, 2019) to make tax-deductible contributions for 2018. See Savingforcollege.com's list of states with later deadlines.

Kimberly Lankford is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.

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