You’ve been saving for your child’s college expenses since she was just a baby. You’ve carefully budgeted and run the numbers for how much college will cost. Now, the time has come to spend some of the money.

There are three main ways you can distribute 529 funds:

1. You can distribute directly from the 529 plan to the institution.
2. You can distribute from the 529 plan to the designated beneficiary.
3. You can distribute from the 529 plan to yourself, the account owner.

In this series, I will be demonstrating how you can make these distributions from a College America 529 plan. In our article “Q&A: Who Pays Taxes and Penalties on 529 Distributions and How?,” you can read about the differences between how each of these distributions are reported to the IRS.

This article is on how you can distribute from a 529 plan to a designated beneficiary.

What expenses can you pay for this way?

You can distribute any amount of money to the designated beneficiary for any reason, but only distributions which are reimbursing for qualified education expenses are tax and penalty free. Distributions in excess of qualified education expenses have the portion attributable to earnings taxed at ordinary income rates. The taxable portion is also subject to a 10% penalty if it does not meet one of the five exceptions.

Qualified education expenses include tuition and fees; books, supplies, and equipment; expenses for special needs services as required by a special needs beneficiary; expenses for room and board, so long as the student is enrolled at least half-time; the purchase of a computer, peripheral equipment, software, internet access, and “related services;” and lower education tuition. For the most accurate list, you can review the qualified tuition program (QTP) section of IRS Publication 970.

That being said, qualified education expenses are reduced by scholarships, grants, or other education assistance. You can read more about this in “What Happens to Your College Savings Plan When You Receive a Scholarship?”

As a result, account owners often wait until all the transactions settle before calculating qualified education expenses and reimbursing for costs.

This impulse to wait raises the question: how long can you wait before you reimburse for expenses? As we describe in our article “Q&A: Can a 529 Reimburse for Last Year’s Expenses?,” there is unfortunately no clear guidance on this topic. Most professionals recommend that you strive to reimburse yourself for qualified expenses during the same year as the expense occurred. If that’s not possible, then reimburse before March 31 of the next year as a safe back-up. If you still cannot meet even the March deadline, there has not been an official ruling yet on when a deadline is. This makes it a matter you will have to decide with your tax professional.

What information do you need to have on hand?

To request a check be sent to the beneficiary, you’ll need:

• The amount you want distributed to the beneficiary
• (If you have more than one 529 plan for the same beneficiary) From which 529 plan you will source the funds?
• To verify that the beneficiary’s address on file is accurate

How do you make the distribution?

Upon your distribution request, the 529 plan will sell sufficient investments to generate the cash and mail a check directly to the beneficiary’s address on file.

Distributions payable to a beneficiary can only be requested by calling American Funds directly. You are not allowed to distribute to a beneficiary online.

To accomplish this, the account owner can call College America directly at (800) 421-4225. The College America representative will verify your identity and ask you for the information described above.

The only tricky question they will ask is “How do you want the funds to be generated?”

The answer “proportionally from all funds” always works. This will keep the current asset allocation of your account the same while still generating the cash for your withdrawal. And yet, you do not even need to remember what funds are currently held in the account.

What do you need to keep for your records?

Distributions paid directly to a designated beneficiary are reported under the beneficiary’s tax identifier, so you will not need to produce records of qualified education expenses for your own tax return.

That being said, the designated beneficiary should keep a copy of the receipts for the qualified expenses reimbursed with a copy of that year’s 1099-Q in case of an IRS audit. This is most easily done electronically with scans as receipts tend to fade in a matter of months and you will need to save these records essentially forever.

Photo of Stanford by Megan Russell. Image has been cropped.