529 college savings plans sometimes feel like a one-way street; it’s easy to move money into the account, but feels difficult when you want to drive your money out. The reason for closing your 529 account will influence the method you use to withdraw funds. The IRS has specific rules for 529 proceeds. If funds aren’t transferred to a new 529 plan or used for qualifying education expenses, you may run into taxes and penalties when you close the account.
Step 1
Close your investment by switching to another manager inside the 529 plan if you aren’t happy with your investment results. Some people want to close a 529 plan because the fund isn’t performing well. Most 529 plans offer many different investment options, and in some cases different managers. This will help you avoid paying taxes on the earnings as ordinary income and a 10 percent penalty on any earnings the fund made before you closed the account.
Step 2
Search for suitable 529 plans if yours isn’t cutting it. You are allowed to roll over your plan to a new one once every 12 months by the government. Check the plan in your state before looking at other plans. Often, your state’s plans will offer state tax breaks that other states can’t match. Use websites that compare plans, such as Savingforcollege.com to look for a low cost plan. Fill out rollover contribution forms with the new plan. The administrator will facilitate the transfer of assets out of your old plan to the new one.
Step 3
Ask your administrator for cash if you have an emergency and can’t come up with funds elsewhere. A check will be issued within a few days. You’ll receive a Form 1099-Q form early the following year. You’ll compute the amount of income tax you owe on earnings and the 10 percent penalty on Form 5329. Attach this to your Form 1040.
Step 4
Add up government credits you’re going to use to help pay college expenses. The government doesn’t allow you to receive tax relief via the American Opportunity Credit and 529 plan dollars for the same expenses. Add together your qualified education expenses, including tuition, fees, books, supplies and equipment expenses. Deduct from the sum of these costs the amount of any education credits you or your parents are claiming at tax time. The difference is the amount you’re allowed to legally take from your 529 plan.
Step 5
Call your 529 company a few weeks before you need funds, if using for a qualified education expense. The firm will send paperwork to you, on which you’ll certify the funds are for qualifying expenses. Some funds have online withdrawal forms to expedite your withdrawal process. In some cases, the firm may only allow a check to be written directly to the institution.
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Writer Bio
As a former financial advisor to companies and individuals for 16 years, Joe Andrews knows financial planning and marketing from start-ups to personal budgets. He also writes on motor racing, board games and travel. Andrews received his B.A. from Michigan State University in English. He is currently working on a young adult novel.