Each year on May 29 the calendar reminds us of the 529 educational savings plan, and opportunities to fund the plan. However, many people funded 529 plans years ago and are now ready to withdraw the funds for their intended use. Distributed properly, all the earnings in the plan can be income tax free as long as the funds are used for Qualified Higher Education Expenses (QHEE). However, as is sometimes the case, the devil is in the procedural details.
It would be nice if just keeping good records of educational expenditures was sufficient to take full advantage of the income tax benefits. It isn’t. There is an extra degree of care necessary to avoid the pitfalls which could result in unnecessary income tax and penalties. Here are a few missteps you’ll wish to avoid.