How to Time a 529 Plan Withdrawal
Section 529 plans are popular ways to save for college education expenses. Taking the time to understand the nuances of the plan may save you a considerable amount of money. This will in turn maximize the amount of money you can save for your child's education.
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Instructions
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Consider contributing as much as possible in your high-income years. 529 plans are tax-advantaged so if your state offers a nice income tax deduction for contributing (and many states do), it can reduce the total cost of your investment.
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Invest up to your plan's limit every year in order to maximize your total contributions.
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Review the meaning of qualified withdrawals. Qualified withdrawals are free and used to pay qualified higher education costs. These expenses are completely free from federal income tax and usually state income tax.
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Resist making non-qualified withdrawals at any time. The withdrawal will be subject to federal income tax (and not at the beneficiary's tax rate).
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Coordinate your withdrawals with the education tax credits within the same tax year. The tuition used for the credit may reduce the amount of money that qualifies as education expenses. A financial aid or tax professional can help with this as each situation is different and depends significantly on your own situation. In general, however, the longer the money stays in the plan the better. For instance, if you need to pay for tuition in January, take your education credit the month before (December) and your 529 withdrawal in January.
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