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Consumer Reports: How to withdraw from a 5-29 plan

Posted: 8:33 AM, Jan 28, 2019
Updated: 2019-01-28 10:33:26-05

TUCSON, Ariz. - When Kim Johnson's daughter, Isabelle was born, Kim began putting money into a 5-29 college savings-plan. And although it's hard for Kim to believe, Isabell is now a college freshman and it's time to start taking money out of her 5-29. Which is a little more complicated than Kim expected.

"We just thought, you know - it's there, it's a bucket of money that we've been saving -- and most recently we are starting to learn that there are some strings attached and rules," says Johnson.

Rules that are important to follow, according to the financial team at Consumer Reports -- if you want to avoid hefty penalties.

"If you don't spend the money on legitimate 5-29 expense, you'll pay income tax on the earnings in the 5-29 and a 10% penalty on the amount you saved," says Johnson.

Legitimate 5-29 expenses include obvious things, such as tuition and supplies, like books and computers. But you can also use the money towards room and board, if you're enrolled in school at least half-time. As you spend, be sure to keep all your receipts. The I-R-S may have questions later! Also, be aware that when you spend the money also matters.

"You need to spend the money in the same year that you make the withdrawal," says Donna Rosato, Consumer Reports. "That means the calendar year, not the school year."

And if you're lucky enough to have leftover 5-29 funds, experts say to avoid taxes and penalties by saving it for graduate school or transferring the money to another child, a cousin or even to further your own education.