Using the College Money You've Saved
Withdrawals from Section 529 Plans and Coverdell IRAs
While your child was growing up, you put money away for his/her education. And now the time has come to spend that money. What records do you need to keep?
Remember that when you put that money away, either in a Section 529 plan or a Coverdell IRA, you didn't get a tax deduction. So when you take the money out, it's not taxable income to either you or your child. And as long as it's spent for an approved purpose, there is no tax penalty. The approved purposes are:
- Tuition and fees
- Room and board, if he is attending at least half-time
- Books, materials
- Computers, peripherals and internet access
You can also withdraw penalty-free an amount equal to any scholarships your child receives.
It is important to keep track of how much your student spends on books, materials, etc. If you can set up a separate checking account or credit card for these items, your bookkeeping will be easier. But there is no requirement to keep the Section 529 / Coverdell withdrawals in a separate account.
At the end of the year (calendar year, not school year) total up your out-of-pocket expenses (excluding expenses paid by scholarships and grants.) As long as this total is larger than the amount withdrawn from your Section 529 / Coverdell IRA, you are not required to report the withdrawals on your tax return or your child's tax return.
And the excess of your expenses over your withdrawals may qualify for a tax deduction or tax credit.
If you are withdrawing money from a traditional IRA, the amounts used for tuition, fees, books, materials, computers & peripherals is not subject to the 10% federal early-withdrawal penalty, even if you are younger than 59 1/2. But the withdrawal is taxable income, if you received a tax deduction when the contribution was made.
Here is an excellent web site for more information:
If you have questions / comments, or would like to enlist the tax services of an experienced CPA, please contact me.
Bess Kane, CPA
January, 2012
Burlingame - San Mateo - Foster City CPA Since '88
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