The crazy number of pictures on Facebook of my friends’ kids graduating from high school means it’s time to talk about how you get money out of the 529 plan to which you’ve been diligently (or otherwise) contributing.

First of all, a 529 plan isn’t like an HSA or medical savings account where you get a debit card to use for your purchases. Paying college bills is a separate process from taking money out of a 529 plan.

There are three ways to take distributions from a 529 plan:

  1. Have a check sent to your student (the account beneficiary)
  2. Have a check sent to you (the account owner)
  3. Have payment sent directly to the school

Although sending large sums of money directly to your child may seem frightening, there are several very good reasons why you would do it this way. The first is that the 529 plan will generate a 1099-Q to report the distributions to the IRS. If the student is the recipient of the distribution, the 1099-Q has their name and Social Security number on it. This will match the name and Social Security number of the student’s expense records. As long as the student’s Qualified Higher Education Expenses (QHEE) are equal to or greater than the distribution(s) made in that calendar year, then nothing is shown on the student’s tax return. The second reason is that in the event that distributions exceed QHEEs (for example, you pre-pay a 2015 expense in 2014 or your student receives a scholarship such that you have excess funds in the 529 plan), the taxable portion of the distribution will be taxed at the student’s income tax rate, which is likely to be lower than the parents’. Lastly, although the IRS can audit a student’s return to verify that 529 plan earnings distributions were properly excluded from income, they don’t seem to do this very often.

If the check is made out to you, the account owner, then the 1099-Q is issued with your name and Social Security number. In this case, you are likely to get a notice from the IRS that you did not report 529 plan earnings on your 1040. You’ll then need to provide documentation of the expenses that offset the distribution. It’s not a difficult process, but if the distribution goes to the student instead of to you, then the process is avoided.

This may leave you thinking that just sending the money direct to the school would be easiest of all. If your student is receiving any form of need-based financial aid, you want to avoid doing this. Why? Because the school may treat the funds coming in the same way as they would an outside scholarship or money from a grandparent: as student income, which will reduce their need-based aid package. If you have a 529 plan and any need-based aid, check with the aid officer at your student’s school before making any direct payments from a 529 account.