When the beneficiary of the account is ready for college, you can rest assured that your CollegeCounts savings will be put to good use with a wide range of qualified expenses and eligible institutions.1
Withdrawals used to pay for qualified higher education expenses (as defined in Section 529 of the Internal Revenue Code) are free from federal and Alabama state income tax2.
Qualified higher education expenses include:
tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a Designated Beneficiary at an eligible educational institution;
– expenses for room and board (with certain limitations) incurred by the Designated Beneficiary who are enrolled at least half-time;
– expenses for the purchase of computer or peripheral equipment, computer software, or Internet access and related services, if such equipment, software, or services are to be used primarily by the Designated Beneficiary during any of the years the Designated Beneficiary is enrolled at an eligible educational institution;
– expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance;
– expenses for fees, books, supplies, and equipment required for the participation of a Designated Beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act;
– up to a lifetime maximum of $10,000 paid as principal or interest on any qualified education loan of the Designated Beneficiary or a sibling of the Designated Beneficiary. A sibling includes a brother, sister, stepbrother, or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense with respect to the loans of a sibling of the Designated Beneficiary are taken into account for the sibling and not for the Designated Beneficiary.
– up to a maximum of $10,000 per year in tuition expenses, incurred by a Designated Beneficiary, in connection with enrollment or attendance at an eligible elementary or secondary public, private or religious school.
Note: The earnings portion of a non-qualified withdrawal is subject to federal income tax and 10% federal penalty tax. In addition, Alabama provides in the event of a non-qualified withdrawal an amount that must be added back to the income of the contributing taxpayer. The amount to be added back will be the amount of the non-qualified withdrawal plus 10% of the amount withdrawn.
Funds can be used at any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education’s Federal Student Aid (FSA) programs. Check out a listing of eligible schools from the Department of Education.
If you receive a refund from an Eligible Educational Institution for Qualified Higher Education Expenses that were paid from money withdrawn from your Account, you can:
Pay for Other Qualified Higher Education Expenses – you can use the funds to pay other Qualified Higher Education Expenses incurred by that Beneficiary in the same calendar year.
Recontribute Refunded Amounts to a 529 Account – if a student receives a refund of Qualified Higher Education Expenses that were treated as paid by a 529 distribution, the student can recontribute these amounts into any 529 account for which they are the beneficiary within 60 days after the date of the refund. The amount recontributed cannot exceed the amount of the refund.
EXTENSION OF TIME – for refunds made on or after February 1, 2020 and prior to May 16, 2020 the IRS has extended the time to recontribute funds to the greater of 60 days or July 15, 2020.
You should consult with your financial, tax or other advisor regarding your individual situation.
Money from a CollegeCounts account can be paid directly to the account owner, directly to the beneficiary, to the account owner’s bank account, or to an eligible educational institution.
Payments to Account Owners, Beneficiaries, and Bank Accounts
An account owner or custodian (under a state UGMA/UTMA) may request a withdrawal online or by downloading and submitting the Withdrawal Request Form.
Plan Ahead When Requesting a Withdrawal
Generally, if a request is received in good order on a business day prior to the close of the markets (typically 3 p.m., central time), the investments will be sold at that day’s closing prices, and a check will be mailed the following business day. Please plan ahead and allow sufficient mail time. For withdrawals payable to the account owner’s bank account, please allow several business days for your bank to process the payment and credit your account.
The tax benefits afforded to 529 plans must be coordinated with other programs designed to provide tax benefits for meeting higher education expenses in order to avoid the duplication of such benefits. You should consult with a qualified tax advisor with respect to the various education benefits.
Taxable Portion of a Distribution
The part of a distribution representing the amount paid or contributed to a qualified tuition program doesn’t have to be included as income. This is a return of the investment in the plan. The designated beneficiary generally doesn’t have to include as income any earnings distributed from a qualified tuition program if the total distribution is less than or equal to adjusted qualified education expenses. To determine if your total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all qualified tuition program distributions for the tax year to the adjusted qualified education expenses. Adjusted qualified education expenses are the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes: the tax-free portion of scholarships and fellowship grants; veterans’ educational assistance; the tax-free portion of Pell grants; employer-provided educational assistance; and any other tax-free payments (other than gifts or inheritances) received as educational assistance.
Coordination With American Opportunity and Lifetime Learning Credits
An American Opportunity or Lifetime Learning Credit can be claimed in the same year the beneficiary takes a tax-free distribution from a qualified tuition program, as long as the same expenses aren’t used for both benefits. This means that after the beneficiary reduces qualified education expenses using tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.
Coordination With Coverdell Education Savings Account Distributions
If a designated beneficiary receives distributions from both a qualified tuition program and a Coverdell Education Savings Account in the same year, and the total of these distributions are more than the beneficiary’s adjusted qualified higher education expenses, the expenses must be allocated between the distributions. For purposes of this allocation, disregard any qualified elementary and secondary education expenses.
Coordination With Tuition and Fees Deduction
A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a qualified tuition program as long as the same expenses aren’t used for both benefits.
1Withdrawals used to pay for qualified higher education expenses are generally free from federal and Alabama state income tax. The earnings portion of a non-qualified withdrawal is subject to federal income tax and 10% federal penalty tax. In addition, Alabama provides in the event of a non-qualified withdrawal an amount that must be added back to the income of the contributing taxpayer. The amount to be added back will be the amount of the non-qualified withdrawal plus 10% of the amount withdrawn.