My social media feeds are full of prom and graduation pictures, which 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 on the 1098-T that the college issues. Basically, the IRS can match the two and recognize that the person withdrawing 529 funds has Qualified Higher Education Expenses (QHEEs) and therefore those distributions are tax-free as long as they are less than the student’s total QHEEs.

Which leads up to the second reason to have the distribution go to the student: in the event that distributions exceed QHEEs, the taxable portion of the distribution will be taxed to whomever received it, at their income tax rate. Most students are in lower tax brackets than their 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 and there is no corresponding 1098-T with your Social Security number on it. 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 who wants to spend any more time dealing with the IRS than they absolutely have to?

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. This can generally be rectified, but again, why do it if you don’t have to. 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. (Distributions sent directly to the college will also be reported on the student’s 1099-Q.)

How do you send the distribution out to your student and still make sure the bills get paid? Here’s what I did: I set up an online savings account in each of my kids’ names and linked it to their 529s and to my bank account. Then I sent the distribution to the online savings account and transferred it from there into my bank account and then paid the tuition bill.

Here’s a pro tip: If your student is starting college in the fall, get their account linked to their 529 TODAY. Many 529 plans require that bank accounts be linked for 45 days prior to receiving a distribution.

Another pro tip: 529 distribution dates do not have to match college payment due dates, nor do they need to equal what’s on the 1098-T. Your 1099-Q will simply show the total distributions taken during the calendar year, and your calendar year distributions can include money withdrawn to pay for costs incurred in the first quarter of the next year. The 1098-T will show total tuition and fee costs net of scholarships. It does not show other qualified expenses such as room and board, and it may show actual costs paid or costs billed (such as for an academic term starting in January). The only important number to match is the Social Security number.