How much should I withdraw from 529?

[Anonymous]

Hello. I would greatly appreciate any help on calculating how much I should withdraw from a 529 account.

• My daughter is in her 5th year of college
• We have taken the American Opportunity Credit the previous 4 years

Below are her approximate expenses for 2023:

• Tuition and Required Fees 10,034.21
• Room and Board  9,678.00
• Combined = Total Qualified Expenses  19,712.21
• Scholarship received  1,550.00

Thank you.

[Bsch4477]

Withdraw an amount equal to your qualified expenses less the scholarship amount. 

[Anonymous]

Will we lose the Lifetime Learning Credit if we go this route?

[Bsch4477]

Withdraw $10,000 less than previously calculated so you would be paying $10,000 out of pocket which you can apply to the Lifetime Learning Credit calculation. 

[Hal_Al]

If you are going to use the full $10,000 of tuition to claim the maximum $2000 Lifetime Learning Credit, then the student will have to declare most of her scholarship as taxable income ($1550 - 34.21 = $1516 taxable scholarship).  If she has little or no other income, she will not actually pay any tax on that income.  

So, the simple answer to your question is: withdraw $9678 from the 529 plan to cover the room and board. You do not have to allocate any of the scholarship to room &board, because room and board are not qualified expenses for tax free scholarship.  You can withdraw another $34, if she claims the full $1550 as taxable scholarship, rather than just $1516.

Since the $10,000 was used to claim a tax credit, you can withdraw another $10,000 and not be subject to the 10% penalty.  However a portion of the distribution will be subject to income tax (but not the 10% penalty).  The full $10,000 will not be taxable; only the earnings portion. 

So, one question is: what do you plan to do with the money remaining in the plan?  You can withdraw some this year, penalty free, but if you wait, it could be subject to penalty in the future.  There are other options, including changing the beneficiary. A new rule allows rolling some over to the beneficiary's Roth IRA (restrictions apply). 

Reference: https://www.journalofaccountancy.com/news/2023/mar/saving-college-new-529-to-roth-irs-transfer-rule....

[Anonymous]

Thank you.