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Ready to Withdraw Your College Savings?
Posted By Ron On October 24, 2011 @ 1:11 AM In College,Parenting,Personal Finance | Comments Disabled
Kids grow up fast. Eventually, the time will arrive to use the money you and your soon-to-be college student have been saving. That time will get here sooner than you think — I know it is for me. When that time does come, you’ll need to know which types of withdrawals to make from those accounts … and when to make them.
In an ideal world, you would only withdrawal from your college savings plan for qualified education expenses since you’re charged penalties for non-educational distributions. Most college education  plans simply require you to submit a form to make a withdrawal and you can generally download these forms from your plan’s website, then print them out, and fax or mail them to the plan’s administrative office. The plan’s office will then issue a check, which you can deposit in your regular checking account. Make certain you keep good records of these distributions and how you spend them.
Once you receive the funds from your college savings plan and deposit the money into your checking account , it’s your responsibility to keep accurate records of all qualified expenses that you pay with that cash. You don’t have to open a separate checking account  for these expenses — you can even commingle the money with your personal funds — but it is critical to keep track of how you spend it. Why? Because no one monitors or dictates how you spend money withdrawn from your college savings account , not even the government (yet). But if the IRS does decide to take a look at your finances by conducting an audit of your personal income tax return, you’ll need a record of your qualified expenses to avoid the steep penalties triggered when you cannot show where you spent the funds.
Keep track of expenses such as:
One of the best ways to keep a record of your education-related spending is to keep a file of all canceled checks that you write to fund qualified expenses. Many banks will still mail your canceled checks to you each month, but it’s easier to print copies of canceled checks on your bank’s website, especially with the PerkStreet Checking Account. 
You can withdraw money for qualified college expenses as soon as they come due. If you have more than one college savings plan, it makes no difference whether you draw from one account before the other, or from both at once, I’d advise you to withdraw from the account with the highest fees first — that way you’ll drain your costliest accounts as soon as possible, pay fewer fees, and still cover your expenses
There’s one more important rule of thumb concerning withdrawals: if you own more than one college savings account  and one of those accounts is a Coverdell Savings Plan, withdraw from your Coverdell first. Coverdells treat the beneficiary rather than the contributor as the owner of the account. Since assets held in the student’s name make it harder for the student to qualify for financial aid than assets held in the parent’s name, you should spend the money in your Coverdell account as soon as possible—ideally during the student’s first year or two of college. That way, you can increase your child’s chances of qualifying for financial aid while continuing to use and contribute to another college savings plan that lists you as the owner.
If you withdraw funds for any purpose other than a qualified expense, you’ll pay tax on the investment earnings plus a 10% penalty on any funds you withdraw. Unless it’s a dire emergency, withdrawals from a college savings plan for any reason other than education expenses is a bad idea.
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