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by Kevin McKinley - March 6th, 2016

Posted Under: around the house

For the past few weeks we’ve been discussing saving for college, and how to prioritize this financial goal. A quick review: save for retirement first, especially using a Roth IRA. After those options are covered, consider using a 529 college savings plan. 

But those who successfully save in a 529 plan will hopefully use that money someday to pay for college costs. You need to know how and when to take the money out, when that day comes. 

Savings, or debt first?

Most families don’t have enough in savings and income to pay the entire cost of getting a higher education degree. As we’ve mentioned before, some student or parent debt is necessary, and okay in most cases. 

But you are generally better off borrowing for college costs first, before tapping any 529 college savings accounts. Especially if the loans are the “federal” loans (subsidized or unsubsidized). 

Taking the loans now guarantees you access to the money at today’s rates—a benefit that may not be available in the future. 

Preserving your savings for the time being allows you to use that money for costs that aren’t covered by federal loans, or any other non-education financial emergency. 

Once your child gets to the point where the accumulated college savings can pay for the rest of her college costs, you can then tap the accounts and make the necessary payments. 

Start by completing the financial aid form at as soon after January 1st of the year your child will attending college in the fall, and consider doing so for each subsequent year that your kid will be in school.

Taking tax credits

Another reason to delay taking money from 529 accounts is that you may be able to qualify for tax credits if you’re making payments from your own savings or investment accounts. 

Those tax credits aren’t available if you also pull money from 529 accounts (tax-free) to cover the same qualified higher education expenses. 

For more information go to, and search for Publication 970, Tax Benefits for Higher Education. 

Withdrawing money from 529s

Once you’re ready to take the money form 529 college savings accounts, there are a few things to know. First, to be tax-free, the money has to be withdrawn in the same calendar year that the qualified expenses were incurred.

Second, the money doesn’t necessarily have to go directly to the school. You can pay the bills as they come, and then make the withdrawals from the 529 account to “reimburse” yourself.

The 529 provider will issue you (and the IRS) a document noting the withdrawal. If you’re ever audited, the IRS may ask you to show proof of incurring and paying the qualified expenses in the same year as the withdrawals were made. 

Note that paying off student loans are not a qualified expense. If you use 529 funds for any other purpose (including paying off education loans), you will owe income taxes and a penalty—but only on the portion of the withdrawal that is the earnings. 

For instance, let’s say you deposited $10,000 into a 529 plan and it grew to $11,000, and then you took the money out and bought a car. 

You would owe taxes and a ten percent penalty only on the $1,000 of gains. Depending on your tax bracket, that could total anywhere from $100 to $500. 

Next week

Many of the issues that we address are often the concerns of people who are a little older and have a little more money than the average person.

But we recognize that there are young adults just starting out who have more “money” questions and concerns than they have money. 

So starting next week we will devote the entire month of March to addressing financial issues of Millennials—generally adults ranging in age from late teens to early thirties. 

If you have a specific  topic you would like us to cover, or a question you would like answered, and are in this particular age bracket, please send an email to [email protected] All personal information will remain anonymous.