Withdrawing Money from College Savings Accounts

Using the College Money You've Saved
Withdrawals from Section 529 Plans

Before your child started college, you put money away for his/her education.  And now the time has come to withdraw that money.

Remember that if you put that money into a Section 529 plan, there was no tax deduction.  So when you withdraw the funds from the Section 529 plan, it's not taxable income to either you or your child, as long as it's spent for an approved purpose, such as:

  • Tuition and fees
  • Room and board (with limitations)
  • Books, materials
  • Computers, peripherals and internet access

Update:  due to the recent tax law changes, withdrawals from 529 plans will also be allowed for K-12 expenses for federal tax purposes.  California has not conformed.

Also, beginning 2020, allowable expenses include costs, fees, and supplies associated with registered apprenticeships (see www.apprenticeship.gov) and student loan repayments (with a $10,000 lifetime cap).

It is important to keep track of how much your student spends on books, materials, etc.  But there is no requirement to keep the Section 529 withdrawals in a separate account.

At the end of the year (calendar year, not school year) total up your out-of-pocket expenses (excluding expenses paid by scholarships and grants).  As long as this total is larger than the amount withdrawn from your Section 529 plan, the withdrawals are not taxable.

And, the excess of your expenses over your withdrawals may qualify for a tax deduction or tax credit.

If you are withdrawing money from a traditional IRA, the amounts used for tuition, fees, books, materials, computers & peripherals is not subject to the 10% federal early-withdrawal penalty, even if you are younger than 59 1/2.  But the withdrawal is taxable income, if you received a tax deduction when the contribution was made.

California's state-sponsored Section 529 plan has an excellent web site with more detailed information.

If you have questions / comments, or would like to enlist the services of an experienced CPA tax accountant, please contact me.

Bess Kane, CPA
January, 2020