Difficulty: Moderately Easy
Step1
Ensure that funds are withdrawn from a 529 account for the purpose of paying educational expenses only. Withdrawals for any other reason will make the proceeds taxable. The withdrawal, added to your regular earnings, could even push you up to a higher tax bracket. Additionally, there's a 10 percent penalty.
Step2
Avoid closing the account if your child decides not to go to college at the usual age. There's no limit on the age of the student for the usage of funds in a 529 account. Keep the account active, in case your child decides to go back to school at a later time. You can also change the beneficiary and use it for your, your spouse's or even your grandchild's education.
Step3
Don't change the beneficiary to someone outside the family. Doing so makes the funds a taxable distribution to the account holder. 529 plans allow the beneficiary to be changed to any "member of family" as defined in Section 529 of Internal Revenue Code (IRC). You can find out who can be considered a "member of family" by reading IRC 529 available at the website of US Code--Electronic Edition (see Resources below).
Step4
Consider withdrawing the funds if the beneficiary receives a scholarship and no longer needs the account. Penalties don't apply under such a situation, or if the beneficiary has died.
Step5
Consult with your plan administrator or fund manager before withdrawing funds. This will ensure that no penalties apply to your withdrawals and that you understand how to time withdrawal to maximize your tax-free earnings.
Step6
Withdraw funds based on need only and avoid lump-sum withdrawals. The funds in your account act as an investment for tax-free earnings. The longer they remain in the account, the more they earn.
