Do the distributions from a 529 plan need to be taken the same year as expenses?
Q.) Tanner from Temecula, California asks:
My daughter is starting her 2nd year of college and I’m wondering if distributions need to be taken each year to match the year of expenses or can they be applied to prior years as well?
Answer from the College Cash Pro:
Taxes, taxes and more taxes. In addition to them being one of those unavoidable things in life, they also bring out all sorts of questions when it comes to treatment of distributions from 529 Tuition Savings Plans.
Withdrawals need only be equal to or less than the qualified education expenses to avoid any tax on them. There is nothing that I have found in IRS Publication 970 that prohibits a taxpayer from taking withdrawals to cover prior year expenses. It is up to you to keep track of and document that these withdrawals cover qualified expenses as outlined in the publication. For record-keeping purposes it may be easier to take the distributions in the same year as the education expenses are incurred. You’ll get a 1099 issued to you from the 529 plan by January 31 for the prior year’s distribution so look for it and remember to bring it in to your income tax preparer.
On this note, you may want to also consider the coordination of education benefits (for example, the deduction for tuition or American Opportunity Credit). Only one can be claimed per student per year. So you may want to consult with a tax preparer but to be safe net out the value of these credits against the balance of qualified expenses and withdraw from the 529 up to that amount.
