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| Withdrawals for qualified expenses at an accredited university are federal income tax free. You can view the list of accredited universities provided by the Department of Education here. Examples of qualified expenses are the typical college student costs: tuition, books, room and board, etc.If a withdrawal is used for non-qualified purposes, the withdrawal is subject to a 10% federal tax penalty and taxes on the earnings.
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| Taxes |
| Withdrawals can be sent to the owner, the child, or directly to the college and a tax form 1099Q will be generated documenting the disbursement. Owners should withdraw the money in the same year they pay for expenses to avoid any tax issues. For example, the owner should not withdraw money in November to pay a bill in January. Additionally, owners must coordinate withdrawals along with other tax incentives such as the Hope scholarship, American Opportunity or Lifetime Learning credit.
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| Financial Aid |
| Withdrawals from parent-owned 529 college savings plans are not counted as income, but the earnings portion of withdrawals may adjust financial aid benefits by half. However, if the student were considered “independent,” the amount of aid reduction would be significantly more. Independent student criteria may include: emancipated minors, orphans, war veteran, age 24 by the end of the school year, in graduate school, married or has dependents.
For grandparent-owned college savings plans, withdrawals are counted as student income, so the child won’t qualify for as much financial aid than if the plan was parent-owned.
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