In this video, CJM Wealth Advisers CEO, David Greene, walks you through how to effectively use your 529 college savings plan when it’s time to start paying tuition. From distribution methods and timing to avoiding tax pitfalls, this video offers practical guidance to help you make the most of your education savings. Whether you’re sending your first child off to college or managing multiple accounts, learn best practices to keep the process smooth, compliant, and stress-free.
Welcome to CJM’s Video on 529 Plan Distributions
David D. Greene:
Hello and welcome to this edition of CJM’s Video Podcasts. My name is David Greene. I’m CEO and adviser here at CJM Wealth Advisers. I’m excited today to talk to you in this episode about 529 college planning and specifically distributions from those 529 plans that you’ve worked so hard to save into.
Graduation Season Means It’s Time to Use Your 529 Plan
So it’s graduation time, June July, looking specifically at high school graduations and commencement speeches and beach weeks and grad parties. And after the smiles and the tears, soon there will be an invoice, fortunately or unfortunately coming in July or August, and we want to prepare you for what happens next to do. So, I’m going to check out a couple of websites as we talk.
Overview of 529 Plan Distribution Options
I’m going to share my screen here and hopefully get technology to work and cooperate such that we will focus first on the College America website. American Funds is the company through which most of our 529 plans that we have with our clients are with.
And so we will look specifically at some of the comments here, but most of the guidance is universal. So first and foremost, as you prepare for the invoices coming in, we want to encourage you to share those invoices with us as soon as possible. So your team members here at CJM can kind of guide you through what happens next. Are we sending checks? Are we doing bank accounts? Those sorts of things. So let’s kind of talk about that. I’m going to skip to the section down below where it says Options for taking a distribution. And in fact, I’m going to come down here to payable to the eligible institution.
Paying Tuition: Send the Check Directly to the College
So one of, or the default that most people think of is I’m just going to send a check to the university or the college and it’ll be good to go. And that’s correct and very easy, especially in that first semester and the second semester of the first year where everything’s kind of wrapped together.
And so you can send a check via the mail or via overnight. There’s certain information that we need to communicate to American funds and we can have that sent out very easily. However, some people say, you know what? I don’t really trust the mail or the FedEx these days. Can I just electronically connect somehow? And the answer is yes, you definitely can. And that gets us up to the first possibility, which is payable to the account owner.
Electronic Payments from Your 529 Plan to Your Bank
In this case, I’m going to start by saying many colleges and universities have portal systems that connect your bank account with the college and the registrar there, and so that you can pay the bills electronically through that ACH connection. You can also have your 529 plan connected to your bank account so that you can pass the monies from the 529 to the bank account and then from the bank account to the portal, I don’t believe, I haven’t heard of anything that connects the 529 plan directly to the portal from an electronic standpoint. So when you get the invoice, reach out to us, let us know. It’s July 10th, it’s due August 15th.
Let’s set up either connect the bank account itself, you’ll probably connect it to your portal and your 529 plans maybe are already connected to that bank account. We can send the monies over and you can send it via the portal and you are all set for the first semester.
Creating a Dedicated College Bank Account for Simplicity
Some clients will take it a step further. We’ll open up a new bank account to keep everything separate, and this is at the same bank, and they’ll connect their 529 plans to this new college checking account and connect that checking account to the portal so that everything over the next four years, or if you have several kids over the next eight to 10 years is in that one bank account around the college expenses. So those are the two main ways you can also send monies directly to the beneficiary. It doesn’t happen too often, so I’m not going to dig into that today, but it does bring up a couple additional questions.
Avoiding Tax Issues with 529 Withdrawals
And one of those, are there tax consequences depending on when my distribution takes place and excuse me, the answer is there can be, in this first semester timeframe, normally not really an issue, but as we get to the second semester and you receive your invoice on December 17th, you want to make sure that you pay it within that calendar year. Or if you receive the invoice on January 7th, you want to pay it in that calendar year.
Sometimes you could get it on December 17th and you ask for the 529 plan reimbursement, but then you don’t pay the tuition bill until January 12th. And so you have the reimbursement from the 529 and one calendar year and the expense in another. And that is a no-no, that we want to truly avoid. The IRS doesn’t like that so easy to avoid. Just take some preparation and just want to make sure you’re aware of that.
Understanding IRS Reporting: The 1099-Q Form
And at the end of the rainbow, when tax time comes, the following April, you will receive a 10 99 Q from American Funds who or whoever, the 529 Plan Institution is just saying, these were the amount of distributions either sent to the account owner or to the beneficiary. I believe if it’s sent to the institution, it essentially goes to the beneficiary. But the tax advisors and the tax software know that if it’s used for qualified higher education expenses, it’s a push.
This is a big reason why we did it in the first place. It grows tax deferred, it comes out tax free if we use it for college. And that kind of brings us to a subset of other just key things to remember. I would say from saving for college.com, as we’ve mentioned, always match those withdrawals to the same tax year as the qualified expenses and understand which expenses are qualified versus non-qualified. Keep detailed receipts really, really important. You don’t have to submit them to the IRS per se. You have to know how much was spent and how much was distributed and match ’em up. And that’s normally pretty easy to do. But if you were ever audited, you want the full list of expenses and receipts, confirm your school’s policy. If we’re sending directly to the college so that it lands in the right department and the right address, et cetera, whether it’s mail or overnight, and know the qualified room and board expenses for living off campus, especially the second, third, and fourth year, it gets a little more nuanced.
We can maybe do that next year or later this year as to how you might approach that. But it’s not just one tuition room and board bill. You might be paying multiple sources. And that goes back to the reimbursement. Having that bank account where you can pay out of specifically for college expenses and being reimbursed for can really, really help.
Final Thoughts: We’re Here to Help
So I think that’s it for today. We wanted to just give you some highlights and some heads up as to what you can expect. Please do reach out to us once you get those invoices and we can guide you along. And congratulations, it’s an exciting time of year and an exciting event, and so hopefully today proved helpful in that realm. Thanks for your attention. Take good care.
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