While recent high school grads eagerly await their first year of college, their parents are doing the grunt work of orchestrating tuition payments to a college’s registrar or bursar’s office. Between July and early September, colleges and universities bill parents for the fall semester and then repeat the process for the spring semester if parents opted to not pay for the full year.
Some financial advisors who offer college financial planning services blog about or send out e-mail newsletters that highlight the nuances of paying for college expenses from their college savings accounts. But for those who are still new to offering services for college financial planning, this can serve as a small guide to the withdrawal process.
In the past 20 or so years, parents have had more than a few ways to save for and then pay for college. The 529 college savings account is the latest trend, but some families aren’t convinced it’s the most suitable option for their needs. So they might have sought out alternative methods like individual retirement accounts and Uniform Gifts To Minors Act (UGMA) accounts to prepare for incoming educational expenses.
Regardless of what vehicle or vehicles were chosen, Jim DiUlio, the chair of the College Savings Plans Network and director of the Wisconsin College Savings Program, says, “Anticipate and plan early” to avoid unnecessary costs.
529 College Savings Accounts: The 529 plan is edging on household name status. The College Savings Plans Network reported that there were 13.3 million such accounts in 2017 and the average account size was $24,057.
The 529 account is a tax-advantaged investment account designed specifically for families to save toward postsecondary education. Families can save in an educational savings plan, a product every state offers, or its sister vehicle, the prepaid tuition plan offered by 11 states (currently 18 states have prepaid tuition plans, but seven are not taking new applicants). One institution also offers the prepaid tuition plan (more on that later).
A 529 can be used for qualified expenses such as tuition and fees, computers and internet access (for college purposes), course-related books, on-campus room and board, off-campus rent (based on the college’s “cost of attendance” figures), and special needs equipment. While much falls under qualified expenses, the items that do not are transportation costs, health insurance and student loan repayments.
Withdrawing funds from a 529 educational account is just as tricky as withdrawing from any other long-term savings account. Families can request that the payment be sent to the account custodian, (usually a parent or grandparent), the beneficiary or a beneficiary’s parent.
When payment is sent to the custodian of the account or the beneficiary’s parent, those individuals should be aware that the IRS will treat the distribution as income and may request proof that the funds were used for qualified educational expenses.
Ronya Corey, a managing director and wealth management advisor at Merrill Lynch, Pierce, Fenner & Smith Inc., says, “It’s kind of an honor system; the only time you’re checked on that is if you’re audited.”