Does it matter when 529 withdrawals are made during the year?

[munger]

Hypothetical: In January my daughter had a tuition bill (tuition only) of $15K. To pay part of it I take $5K out of her 529 leaving a balance of $6K. Before year's end can I just take out the remaining $6K to ... let's say help her buy a car? The total of $11K withdrawn is still less than the $15K tuition bill. I should add ... withdraw without a penalty.

[Carl]

529 withdrawals are for two basic types of expenses.

1. the qualified education expenses of tuition, books, and lab fees.

2. The unqualified but allowed expenses of room and board, provided that room and board is "in direct support" of the education.  (Transportation does not fall into this.)

Withdrawal for any other reason is subject to tax and a possible withdrawal penalty.

It's also important that when you make a withdrawal, that you utilize that withdrawal for one of the above two stated purposes in the same tax year the withdrawal is made. Otherwise, it would be considered an unqualified withdrawal and taxed.

In addition to taxes on an unqualified withdrawal, penalties could be assessed too. It just depends on the plan.

Now there are exceptions that would negate any penalties that may be assessed. But it will not negate the taxability of the withdrawal. Transportation is not one of those exceptions unless it qualifies under one of the exceptions - such as unforeseen medical emergency expenses. Such an exception is a SCH A deduction and subject to the 7% of AGI rule before any destructibility benefit would kick in.

Finally, understand that the withdrawal will result in a 1099-Q being issued to the name beneficiary of the fund at the time the withdrawal was made.

[Hal_Al · Accepted solution]

Q. Does it matter when 529 withdrawals are made during the year?

A. No. The only timing requirement is that  the distribution (withdrawal) must be in the same calendar year as the qualified expenses. So, your plan is allowed. You can withdraw $5000 in January and $6000 in December to cover the $15,000 you spent in January.   That leaves you $4000 of tuition to use to claim a tuition tax credit.

As others have said, Room & Board (R&B) are also qualified expenses for 529 distributions. Board qualifies even if the student lives at home.  The student must be half time or more.  By allocating the 529 distribution to R&B, that allows more tuition to claim a tax credit for.

$4000 is the maximum amount of tuition needed to get the maximum American Opportunity Credit (AOC). Grad students are not eligible for the AOC. It takes $10,000 of tuition to get the max Lifetime Learning Credit, for which all students qualify.

[munger]

Thank you. That confirms what I thought. As long as the expenses are in the same calendar year as the withdrawal all is well.