Match your tuition bills to 529 withdrawals

529 plans are a very popular way to save for college. These days, nearly every one with kids has a 529 plan or is thinking about starting one. However, there are a lot of rules associated with 529 plans. If you are currently making withdrawals to cover the expenses of a child already in college, you need to know that you could be inviting an inquiry from the IRS if you don't schedule the withdrawals from your 529 account to occur in the same year as the payment of qualified education expenses.

Here is an example: the bill for your son or daughter's winter semester at college arrives at your home in December -- before the semester starts. If you write a check from your personal checking account in December but don't get around to making the withdrawal from the 529 account until a week or two later -- sometime in January -- you could find yourself explaining your situation to the IRS. That is because the 1099Q form that you will receive the 529 plan will show a distribution in 2009 but you paid the expense in 2008 (and the 1099-T form you will recieive will show a 2008 date). If this is your child's last semester at college, you won't have any qualified expenses in 2009. That could be a problem and you could be hit with a taxable distribution and a penalty.

In January 2008, there was an IRS Announcement (2008-17) that seemed to indicate that you could withdraw funds in one year but pay expenses through March 31st of the following year, but that announcement is not official guidance. To be safe, it is still best to try to match the 529 plan withdrawals with the payment of qualified expenses.