How to Reimburse Expenses From Your 529 Account
Updated April 12, 2023 · 5 Min Read
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A 529 plan lets individuals save for college in a tax-advantaged account. What does that mean? Putting money in a 529 plan can save you money on taxes. It also makes it easier to save for college.
What about 529 account reimbursement? Can you reimburse yourself? After putting money in a 529 plan, you can withdraw money to pay for college. You can transfer money to a college directly or make a 529 account reimbursement.
As long as you reimburse yourself in the same calendar year as your educational expenses, you can avoid income taxes or penalties. A 529 plan makes sense for most families saving for college.
Do 529 Distributions Count as Income?
Before opening a college savings plan, research how to spend from a 529 college plan. Note that 529 distributions don't count as income. As long as individuals use their 529 funds for education expenses, they don't need to report the distributions on their tax returns. They also don't need to report their 529 savings on the FAFSA.
Savers who spend their 529 funds on non-qualified expenses may need to pay income tax on the money.
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What Happens to a 529 Plan if It Is Not Used?
What if the beneficiary decides not to go to college? How does 529 account reimbursement work then? Savers can explore several options. They can change the beneficiary. They can also use a 529 plan to pay for K-12 schools or to pay off student loans.
Or, they can withdraw the cash. However, they must pay federal income tax on the withdrawal and a 10% penalty. If the beneficiary earns a full scholarship, the government waives the penalty.
How Much Can I Put in a 529 Per Year?
Federal guidelines cap how much savers can keep in a 529 plan. Each state interprets this limit. States set maximum savings by looking at the cost of five years of attending college. In every state, a 529 plan can save up to $235,000 per beneficiary. Some states allow over $500,000 per beneficiary.
This means someone could fully fund a 529 plan in a single year. However, few people hit that limit. The average 529 plan contains under $29,000.
Types of 529 Plans
Savers can choose from two types of 529 plans. Review the differences before opening an account.
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1
Education Savings Plans
An education savings plan lets savers invest money in mutual funds, age-based funds, or other investment portfolios. Much like a retirement account, contributions grow over time in an investment account. These plans are more common than prepaid tuition plans. They offer more flexibility and choice over the investment strategy.
However, savers often pay asset management fees with an education savings plan. Make sure to research fees when comparing plans.
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2
Prepaid Tuition Plans
A prepaid tuition plan lets savers pay for college tuition at today's rates. When students attend college, the plan covers as many credits as the saver purchased. State governments typically offer prepaid tuition plans. These plans cover the cost of in-state, public college tuition.
Prepaid tuition plans come with more restrictions. These include state residency requirements and less flexible options to pay for K-12 educational expenses. These plans typically don't charge as many fees as education savings plans.
Benefits of a 529 Plan
A 529 plan offers many benefits. However, 529 plans don't fit every family's education savings needs. See below for some advantages to opening a 529 plan.
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Possible State Tax Breaks
A 529 plan allows families to save on taxes. When withdrawing money, savers may not need to pay state tax on the earnings. Some states also offer tax incentives to deposit money into a 529 plan. In New York, parents can deduct $5,000 on their state taxes for putting $5,000 into a 529 plan. -
Save for Education at Your Own Pace
Families can save for education gradually with a 529 plan. This is better than facing large tuition bills once their child reaches college. Individuals can also use a 529 to save money for their own future education expenses. Saving over time makes it easier to pay for school and minimize student loan debt. -
It's Easy to Maintain
Creating a 529 plan takes minutes. Maintaining it can take even less time. Savers can set up regular contributions, make one-time deposits, or use the gift contribution features to add to their account. Many 529 plans also offer age-based target funds based on the expected college start date.
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