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Best Practices When Taking 529 Plan Withdrawals

D Cator 2014
Donna L. Cator, CFP®, CDFA®
Vice President, Wealth Advisor
[email protected]
(585) 394-4260 x50623

To make the most of your Section 529 college savings plan, consider the following:

Qualified expenses. 

Withdrawals from a 529 college savings plan are tax free, provided the withdrawals are not more than the account beneficiary’s qualified higher education expenses for the year. Qualified expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance and room and board for students who are enrolled at least half-time.

Don’t waste your tax credit. 

Be careful when withdrawing money from the 529 plan if you also qualify for the American Opportunity Tax Credit.* For 2014, this credit is equal to 100% of the first $2,000 of qualifying expenses (generally, tuition and fees) and 25% of the next $2,000, for a total credit against your tax bill of up to $2,500. However, you cannot “double dip” — that is, you can’t take the credit for the same education expenses you paid with money withdrawn from the 529 plan. 

For this reason, you might consider paying the first $4,000 of your child’s college tuition with your own money and paying the balance of your child’s qualified higher education expenses with distributions from the 529 plan. That way, you may use both the American Opportunity Tax Credit and the income exclusion for qualified 529 plan distributions.

* In 2014, the credit phases out ratably for taxpayers with modified adjusted gross income of $80,000 to $90,000 ($160,000 to $180,000 for married taxpayers filing jointly).

Tax information presented is not to be considered as tax advice and cannot be used for the purpose of avoiding tax penalties. Canandaigua National Bank & Trust does not provide tax, legal, or accounting advice. Please consult your personal tax advisor, attorney, or accountant for advice on these matters.