As noted in my net worth updates, I have 529 account as part of my Fidelity 2% Cash Back card. The 2% is nice, but the only way to get your contributions and earnings out of the 529 tax-free is to have real college expenses.
Now that I’m in college, no problem right? But then I read that the same college expenses cannot be both reimbursed by a 529 account and be used in claiming my Lifetime Learning Credit. I don’t have more than $10,000 in tuition, and getting 20% back is much better than cashing out my 529 tax-free. So I was bummed, until I read that 529 plans are also allowed to cover room and board, which the Lifetime Learning Credit does not. Yes!
Because I don’t live on campus, the I can only use 529 money towards the estimated room and board costs included in the cost-of-attendance figures for student financial aid purposes. This differs for each college, but I’m sure that would easily be more than the $1,700 or so I have in my account. So I’m going to fill out a Fidelity’s disbursement form and hope it goes smoothly. It really doesn’t look like they do any kind of check that your money is going toward “qualified expenses”, so even if you were lying the only real danger is if you get audited. Still, I always go by the book, and audits can reach back several years.
I also considered leaving the money in the 529 to grow for my (unborn) kids, but I figure I’ll wait to cross that bridge until I get to it. The lame thing about 529s is that technically the tax-free earnings part is set to expire at the end of 2010, unless Congress extends it. I don’t see how they wouldn’t, but still.
My account has earned about 4% since opening as it was invested in a conservative portfolio, so technically I got even more than 2% cash back! Thanks Fido!
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do you now how to get the money out on the fidelity website? Money meaning the money you put in. I can’t seem to find the option anywhere.
Just fill out the disbursement form I linked above.
From what I can tell, it seems like Fidelity just writes you the check and report the distrubution to the IRS – the 529 owner (you) are responsible for paying the proper taxes and penalties on the distribution. So save your tuition bills and expenses. For me I just printed out the Room & Board estimate from my university’s website.
Will you have to pay your own state’s income taxes on the withdrawl if you are not a resident of New Hampshire? Looking at the Fidelity website, that’s the state that the “National” plan is tied to.
Thanks
This is great info. I’m planning on going back to school and have the same plan. I didn’t realize there’d be a conflict with the lifetime learning credit.
Matthew – Good question. For my state, all qualified 529 withdrawals (no matter the program) are not taxed at the state level. From my research, it seems most states also do not tax them. But you’d have to check your specific state to make sure.
FYI for future reference. Want to save that stamp and a couple days worth of waiting? You can just call them up and they can transfer that money right up into your bank account (the same way they auto-deposit from it each month). I just got off the phone with them myself (very helpful people!).