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.

What expenses can you pay for this way?

You can distribute any amount of money to the account owner for any reason, but only distributions which are reimbursing for qualified education expenses are tax and penalty free.

This is an odd and surprising fact. Gifts to 529 plans are legally considered “completed gifts” to the beneficiary, a status normally only reserved for assets which have so fully transferred to the receiver that the money cannot be taken back. And yet, 529 plans permit account owners to distribute money to themselves, change who the account owner is, and change who the beneficiary is.

Anyone who is used to thinking of tax loopholes may immediately see the holes in the 529 plan rules. The IRS is aware of these interesting predicaments as well. In 2008, the IRS issued an anti-abuse bulletin to caution taxpayers from utilizing 529 plans for anything other than the goal of supporting qualified education expenses for you and your family. In the bulletin, they gave themselves the weapon of being able to remove favorable tax treatment from any person who is thought to be abusing 529 plan legislation.

For this reason, the best practice for account holders distributing to themselves is to 1) distribute for the beneficiary’s qualified education expenses where you have a copy of the receipt and 2) give the distributed funds to the person who paid on the original receipt.

The person who paid does not need to be the account holder or the beneficiary, and you do not need to use the 529 plan funds specifically to pay the bill. You can reimburse to an unrelated third person who paid the bill originally.

That being said, distributions to the account holder are included in the account holder’s tax return, and the burden of proving qualified education expenses which offset the distribution lies with the account holder.

What information do you need to have on hand?

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

• The amount you want distributed to yourself (the account owner)
• (If you have more than one 529 plan for the same beneficiary) From which 529 plan you will source the funds?

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 account owner’s address on file.

Distributions payable to the account owner can be requested in one of two ways. You can either call American Funds directly to request the distribution or you can use their online portal to place the necessary trades and request the distribution. Calling them on the phone is almost always easier for clients.

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?

You 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.