529 Plan Distribution Flowchart

////529 Plan Distribution Flowchart

529 Plan Distribution Flowchart

By |2017-10-09T20:37:32+00:00October 10th, 2017|Research Insights, Tax Efficient Investing|1 Comment

I recently had a conversation with a client who had a big fat 529 plan and was planning to take a distribution from it to pay for his child’s first college tuition payment.  We both knew that this 529 plan would cover all the costs associated with college.  His question was surprisingly simple:

As long as this goes toward college expenses, I don’t have to pay taxes on the gains, right?

Unfortunately, my answer was anything but simple.

I began by explaining what expenses qualified, and which ones did not.  By the time I explained how tax-free educational assistance impacts a 529 plan distribution, my client’s eyes were starting to glaze over.  I never even broached the impact that tax credits would have on the distribution. The problem was that I knew his situation well enough to know that he could very easily find himself getting taxed on a small portion of the distributions.

Instead of droning on and on, I stopped and offered to sketch out the concept and have presented it below.  This made sense for the client and understood where the tax landmines were located.

I thought other investors and advisors could benefit from this flowchart:


If you want to see more flowcharts about other financial planning topics, check out the recent post on IRA Rules Visualized, or  join our mailing list to get them emailed to you.

And finally, I’m always looking for my next flowchart idea.  If you have any ideas, please email me.

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About the Author:

Michael is a Financial Advisor bringing over a decade of experience in the financial services industry. He leverages his background in advertising to distill complex client situations into straightforward strategies, to provide a clear roadmap for the client to follow and injects a disciplined approach to all facets of the process.

One Comment

  1. Jack Hayes October 13, 2017 at 2:27 pm

    I got a nice chuckle out of your flow chart re: 529’s, having gone through the experience with our son attending two different schools in 2016. You left out a very annoying step, though–reconciling your own withdrawals to the 1098-T forms from the colleges. Some is pretty straightforward, like books and housing expenses, but some isn’t, since there were required fees that were not included on the 1098-T form.

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