Parents who have been saving for their children’s college expenses for years know that once a tax-advantaged 529 college savings account is opened, it’s easy to put money in that account. But they may not be as savvy about how best to take the money out.

Withdrawing funds from a 529 is not as simple as it sounds. While money continues to flow into these plans – with $431 billion in assets in the first quarter of 2022, according to ISS Market Intelligence – many families still don’t fully understand how these accounts work how these accounts work.

According to a recent survey by financial services firm Edward D. Jones, only 40 percent of Americans think of 529 plans as a way to save for college, and a 2021 survey found that even among those who do, 67 percent are unaware of the possible tax benefits and other features of 529 accounts.

If you have a child going to college this fall and plan to use 529 funds to pay for expenses, it’s important to withdraw funds correctly. A mistake can be costly: you could be subject to a 10% penalty and you’ll have to pay interest on the earnings for any funds used for the wrong expense.

When you’re ready to withdraw money from your 529 college savings account, keep these points in mind.

Shift your savings to safety
Until now, you may have been investing your 529 account in a combination of stock and bond funds, or in age-based funds that hold both. But now that your child is in college, you need to make sure you move the money you need for these expenses into safe investments, such as money market funds.

Gordon Achtermann, a certified financial planner in Fairfax, Virginia, says, “You don’t want a stock market drop to cause a loss in your account just when you need that money to pay for school.”

Note that under IRS rules, you can only switch investments within a 529 account twice per calendar year.

Another option may be to change the beneficiary of the account to another qualified family member, which will allow you to switch investments.

Withdrawals for Eligible Expenses Only
You can use funds in your 529 account for a variety of qualified education-related expenses. This includes tuition, fees, books, supplies and computers.

The money can also be used to pay for room and board, as long as the student is enrolled at least half-time in school. Dormitory fees are always included, but if your child lives off-campus, please check the college’s “Cost of Attendance” data to find the amount that qualifies for off-campus housing.

“You need to be careful to keep track of where your 529 funds are going in case the IRS raises questions,” says financial aid specialist Kalman Chany, author of Paying for College (Princeton Review, 2020).

Not all college-related bills are valid for 529 funds. For example, expenses such as transportation and insurance are not included. If you’re not sure if a particular expense is eligible, check with your plan provider.

Your 529 funds can also be used for K-12 education expenses – up to $10,000 per student per year. However, not every state considers elementary and secondary school expenses to be qualified education expenses, so check with your plan sponsor to find out exactly what is covered under the plan you choose.

Since the passage of the SECURE Act in 2019, 529 funds are available to repay up to $10,000 per beneficiary of qualified student loan debt. The legislation also allows 529 funds to be used for eligible apprenticeship programs and transfers to ABLE accounts, which are tax-free savings accounts designed to benefit children and adults with disabilities.

Time payments
Remember, you must withdraw funds from your 529 account within the same calendar year as the withdrawal (not the school year), and you should keep the receipt.

“Pay close attention to the timing of withdrawals to make sure they match what you pay, especially around the end of the year,” says Kevin Hegarty, a certified financial planner in Gadsden City, New York

For example, if you used your savings to pay for spring tuition in December and then reimbursed yourself in January from a 529 plan withdrawal, that would not be a qualified expense.

Don’t miss out on the tax credit
You may be eligible for one of the education tax credits, the American Opportunity Tax Credit (AOTC), or the Lifetime Learning Credit, which can provide you with a tax deduction for college expenses. However, if you use a 529 plan to pay for these expenses, you will not be eligible for the credit.

“The IRS doesn’t allow double taxation,” says financial aid specialist Mark Kantrowitz, former publisher of saveforcollege.com.

So plan ahead to avoid disqualifying yourself from receiving the tax credit. kantrowitz recommends paying the credit for tuition and textbook costs before using a 529 plan to allocate payments for the remainder of your expenses.

With the AOTC, you can receive a $2,500 tax credit per eligible student when you spend $4,000 on qualified college expenses. It applies to the first four years of college. For single taxpayers earning more than $80,000, eligibility for the tax credit begins to phase out and stops at $90,000. For parents who are married and filing jointly, the credit begins to phase out if their income is at least $160,000. If the couple’s income is $180,000 or more, there is no credit.

The Lifetime Learning Credit gives you up to $2,000 per year back and can be applied to undergraduate, graduate and professional degree programs. There is no limit to the number of years you can claim the credit. Income limits were recently adjusted to match the AOTC.

Spend or save the remaining funds
If you’re one of the few savers who get a balance after your child’s college graduation, then you have a few options.

You can save for graduate school or transfer beneficiaries to other family members, such as young children or a spouse who wants to return to school.

You can also withdraw money from the account entirely. If you do this, you will owe only interest on your earnings, plus you will pay a 10% penalty.