As funds get distributed to the parent or the school, a 1099-Q form gets sent along with them to track distributions coming out.
“[Parents] don’t have to file that with their taxes, but [they] have to keep it in case [they] get audited,” says DiUlio. “The broader picture is that we want to make sure you’re not money laundering.”
Families can also ask the provider to send payment directly to the educational institution, as long as they don’t need to use the funds for anything else.
As long as withdrawals are for qualified expenses, then families won’t pay federal taxes on them. The penalties and taxes come when families withdraw more than the total cost of college expenses for that year or take out money for nonqualified expenses.
“Withdrawals from 529 plan accounts exceeding the amount of qualified expenses paid during the tax year will trigger ordinary income tax plus a 10 percent penalty on the investment earnings portion on any withdrawal,” writes David Mayes of Bearing Point Wealth Partners on Fosters.com.
Corey points out that many of her clients who are parents pay out of pocket for a lot of things on-site and then reimburse themselves later. If this happens, DiUlio admonishes families to take the money out in the same calendar year that their expenses occurred.
Prepaid Tuition Plans
The one institution that operates a prepaid college tuition plan is the Private College 529 Plan (also known an PC529). This plan works with over 300 private colleges and universities to help families lock in a tuition price that the family can then open an account for and save toward.
Bob Cole, president of the Private College 529, believes the process for using a PC529 account to pay for school is quite simple.
After receiving an acceptance letter to a participating school, a family completes the tuition certificate redemption form. On the form, the family indicates the amount of the bill it wants to redeem with PC529 certificates if it plans on using other fund sources.