The cap and gown have been ordered, the caterer booked and the invitations sent. As you prepare to celebrate one of your child’s biggest achievements to date – high school graduation – you can’t help but think about what’s next to come. After years of saving money in a 529 plan, it will soon be time to put those funds to use and pay your first tuition bill. But before you take a withdrawal from your plan, you’ll want to make sure you understand how the process works to help ensure you don’t lose out on any potential tax benefits, or worse, run into an issue that delays the withdrawal itself.
To help get you started in the process, here are some key decisions you’ll need to make.
Who to pay
Generally, 529 plans will let you decide how you want your funds distributed. Ascensus College Savings, which provides program management and administration services to 31 plans, offers online self-service accounts where owners can simply log in and select who they would like to pay. Most plans give you three options – distribute payment to the account owner, the beneficiary or the school. Some plans will even let you make a payment to a third-party, such as a landlord of an off-campus apartment.
How to pay
Once you’ve decided on where to send your 529 funds, the next step is to select the type of payment. The majority of plans offer two options – you can make an ACH deposit to your bank account, or have a check printed and mailed. In some cases, you may be able to pay the school directly through an ePay system.
When to pay
Tuition due dates will vary, depending on the school, but your fall tuition will likely be due in late July or August, and December or January for spring tuition. But that doesn’t mean you have to wait until your bill is due to withdraw from your 529 plan. If you plan to take your distribution as a check or ACH deposit you can take the money out once you know how much you’ll need, and have it ready to go once the bill comes. Just make sure your plan withdrawals are taken in the same year as the qualified expenses were paid.
A number of schools also allow payments to be made in installments over the course if the academic year. Families utilizing this type of tuition payment plan will also be able to use the new epay solution from Ascensus where available, instead of having to send multiple checks through the mail.
Issues to avoid
If you know you’re going to need to make a distribution, you can save yourself some trouble by checking your account to make sure its information is up-to-date. Last-minute changes can result in delays to withdrawals. For example, if you request an address change it may put a temporary hold on the account due to fraud prevention measures. The duration of the hold is designed to allow sufficient time for the account owner to receive notification that a change was made and, if it were fraudulent, to notify the appropriate parties.
An account hold is designed to protect the account owner and the assets in the account. However, legitimate account changes can still trigger these safety measures depending on the plan, so call ahead to make sure you don’t encounter any issues when it comes time to make your withdrawal.