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Portage County Farmers Market

Know Your Withdrawal Rules

By Portage County Business Council

By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®

After a workshop that we’d put on a few weeks ago, I had a gentleman approach me with a situation.  He had been saving for his daughter in a 529 college savings plan since she was young.  He and her mother had divorced, and for a period of time his daughter had estranged him.  She did not want anything to do with him or the money that had been saved for her education.  Fortunately, the relationship was restored.  She accepted the money in the 529 account during her senior year.  She used the money to pay tuition for that year as well as the college loans that she’d acquired from previous years.  She had documentation showing the debt was directly from previous years college tuition and related education expenses.  When it came time to file taxes, the father’s tax preparer stated this was an appropriate use of the funds.  His daughter’s accountant told her otherwise, stating that the portion of the 529 funds that was used to pay off the loans was not a qualified withdrawal, and therefore is subject to taxation and penalties on the earnings.  Who is correct?

Unfortunately, the daughter’s accountant had the correct answer.  For the withdrawal to be a “qualified withdrawal”, the money needs to be withdrawn from the 529 account in the same calendar year as the allowable expenses were incurred.  Currently, student loan payments are not considered for qualified withdrawals from a 529 plan.  Those rules could change in the future, as legislation has been introduced for such an allowance.  In this case though, since the distribution had occurred last year, the earnings portion that had been used to pay down the college debt is unfortunately subject to federal and state taxation as well as a 10% federal penalty.  529 plans are sponsored by states, state agencies or educational institutions.  They are technically “qualified tuition plans” but are nick-named 529 plans because they are authorized by section 529 of the Internal Revenue Code.  Each plan has differences in how they are run and can have their own individual requirements in addition to the IRS rules.

Saving and investing for your future and for the future of your loved ones is critical for success.  Getting money into a plan or an investment, be it for future education, retirement or other future needs imperative.  From there, understand how your account works during the time that your money is committed, and the rules for the money to come out when you need the funds.  After all, that was the whole point right from the start, to save and invest in an efficient way to help achieve your goals.

LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for an individual.  All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.  Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.