Dear Rick:
I have a couple of questions I hope you can help me with. A number of years ago I bought a 529 Plan for my grandson. Sometime next year he will start needing some of the money. I was told by the 529 company that I can either have them send a check directly to the university, or if I was going to pay, they would send me a reimbursement check. That is the way I’m going to proceed. My question is what documentation do I need? The 529 company said if I’m audited it’s up to me to have the necessary documentation. My next question is, I was told by a friend that on 529’s, if I pass away before the money is used, my grandson loses the money; is that true?

Thank you.
H. B.

Dear H. B.:
First of all, congratulations on helping your grandchild through college. I think helping someone with their education is a wonderful gift and something that will help them the rest of their life. College education has gotten ridiculously expensive and anything parents and grandparents can do to help share the burden is money well spent.

With regard to documentation, it’s like most things in our tax laws in that if you are audited by the IRS, is it up to you to prove the deduction. In the case of 529 Plans, if you are audited by the IRS, it would be up to you to prove that the money was spent for a qualified education expense. A qualified education expense is basically tuition, fees, books and other educated related expenses. Therefore, if you’re using the money from a 529 Plan to pay tuition, a statement from the university would be sufficient. If the money was for books, a receipt from the bookstore would be sufficient. The bottom line is you need receipts to show that the money was spent for a qualified education expense.

Documentation to show expenditures for a 529 Plan is no different than documentation you would need to prove a charitable contribution. You don’t send the documentation in with your tax return; rather, you retain it in your files in case the IRS wants to see it. Obviously, the more documentation you have, the better it is.

With regard to what happens to the 529 upon your death, whoever told you that you would lose the money is absolutely wrong. That is absolutely not the case. What happens upon your death is your 529 Plan continues to exist. The only difference is who the trustee of the plan is. Currently, you are the trustee and more likely than not, when you established the plan you named an alternate to take over in your place. Even if you did not name an alternate, your grandchild would still not lose that money for college. What I would recommend that you do is contact your 529 Plan to make sure that you’ve named an alternate. If not, they can provide you the paperwork to name one.
529 Plans are an excellent way to save for a child’s or grandchild’s college education. The beauty of these plans is that when money is withdrawn for a qualified education expense, the money is withdrawn tax free. Therefore, it allows you to save for a loved one’s college education on a tax-free basis.

There are many 529 Plans and they’re not all the same. Some plans are state specific which means that you can only use them for higher education in those states while other plans basically allow you to use them for any public or private institution in the country. In today’s world where flexibility is the key, I recommend the plans that give you great flexibility and allow you to use the money throughout the country. In addition, what distinguishes plans is the cost involved. Some plans have higher costs and commissions, while other plans are commission-free. I obviously like the plans that are commission-free because it means more money is going towards your loved one’s education and not into the hands of others. In fact, what you find is that even in Michigan you can buy a Michigan Education Savings Plan directly and have very low fees or you can go through a financial advisor and pay much higher fees.

529 Plans generally have very low minimums and you’re not required to make ongoing gifts. Therefore, if you’re looking at making a gift that will make a difference in someone’s life, a contribution to a 529 Plan, is a wonderful choice.
Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.