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Parents who’ve been saving for college for years know that it’s easy to put money into a tax-advantaged 529 college savings account once it has been set up. But what about taking the money out?

Over the next few months, many parents will start paying college expenses. If you’re among them, be sure to withdraw your 529 funds correctly. A mistake can result in a 10 percent penalty, plus you’ll have to pay interest on the earnings for funds that you used for the wrong kinds of expenses.

Here’s what you should know about making withdrawals from a 529 college savings account.

Withdraw Funds Only for Qualified Expenses
You can use funds from a 529 account for tuition, fees, books, supplies, and computers. They can also go toward room and board expenses, as long as you’re enrolled at least half time at school.

Dorm expenses are always covered, but if you’re living off campus, check your college’s “cost of attendance” figures to find out the amount that’s considered qualified for off-campus housing.

Expenses such as transportation and insurance, for example, are not covered. If you’re unsure whether an expense qualifies, check with your plan provider.

Keep in mind that you have to spend money from a 529 account in the same calendar year (not school year) as the withdrawal, and you should keep your receipts.

“The 529 provider may not require proof of the withdrawal, but the IRS could have questions,” says Young Boozer, treasurer of the College Savings Plan Network and state treasurer of Alabama.

Under the Tax Cuts and Jobs Act, 529 money can also be spent on K-12 expenses, but only up to $10,000 per student each year. Be aware that not every state will recognize elementary and secondary school expenses as qualified education costs, so check with your plan sponsor to find out what is covered in the plan you choose.

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Decide Where You’d Like the Account to Send the Funds
The account provider can pay the school directly or it can write a check to you or your college-aged child. Having the money sent directly to the school may be the simplest option, but it could have financial aid implications, and it won’t help you if you need the funds to pay for supplies or rent.

Something else to consider is how much control you want to maintain over the funds. If you have the money sent directly to your college-aged child, will he or she keep detailed records and receipts of how the funds were spent?

“One of the benefits of a 529 is that the account owner retains control of the assets,” says Brian Boswell, vice president of research and development at “Once you’ve disbursed those assets to the beneficiary, you lose that control, and not every student is responsible.”

Remember That Using a 529 Account Can Disqualify You for Tax Credits
The American Opportunity Tax Credit gives you a $2,500 tax credit for spending $4,000 on qualified college costs. But if you pay for it with money from a 529 account, you don’t get the tax credit.

“The IRS doesn’t allow double dipping,” says financial aid expert Mark Kantrowitz, president of Cerebly and publisher of Private Student Loans Guru. “Carve out $4,000 of tuition and textbook expenses before using a 529 plan distribution to pay the remaining costs.”

Keep in mind that eligibility for the credit begins to phase out for single parents with incomes above $80,000. It cuts off at $160,000.

For those who are married and filing jointly, the credit begins to phase out if you have an income of at least $90,000. There’s no credit if your income is $180,000 or more.

Make Withdrawals Strategically to Minimize Borrowing
There are limits to the amount you can borrow via federal loans each year ($5,500 in your first year, $6,500 in your second year, and $7,500 after that). 

If you think your total borrowing will exceed one year’s loan limit, you should make smaller 529 withdrawals each year to spread out your federal loans.

If you keep each year’s borrowing below the federal limits, you won’t have to resort to private loans, says Fred Amrein, a fee-only financial planner in Wynnewood, Pa.

Though interest will accrue on the federal loans, you’ll probably borrow less overall and you won’t run out of money in your 529 account.

Spend or Save Leftover Funds
If you’re among the few savers who end up with a balance upon college graduation, you have a few options.

You can save the money for graduate school, or switch the beneficiary to another family member, such as a younger sibling or a parent who’d like to go back to school. You can also cash out of the account entirely. If you do that, you’ll owe interest on the earnings only, as well as a 10 percent penalty. 

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