In the eyes of many college savers, 529s are simple. Save money regularly while your student ages, then withdraw money as college expenses occur, either paying the school directly from the 529, or paying expenses out-of-pocket and reimbursing from the 529 later. From a casual glance, 529s look a lot like a regular savings account with some additional tax advantages/penalties.
But 529s can be more than that. One of my 529 tips concerns the timing of 529 withdrawals. The tax law states that the total withdrawals shouldn’t exceed the total eligible education expenses in a tax year. For example, a saver could wait until late December to withdraw money for an expense that happened in early January. This can give your savings another year of compounding. I like to call this the “December is for Withdrawals” tip.
Clearly this tip is a minor tip and it doesn’t make sense for everyone. Floating education expenses for months may not work with your budget. If it’s not a good fit, don’t worry and withdraw the money when you need to.
Unfamiliar Account Delay
If you use the “December is for withdrawals” tip, don’t wait until the last day of December to withdraw money. I save with Virginia 529 and I’ve noticed that it can take as long as two weeks to complete withdrawals. For example, last year I started a withdrawal on December 15 to reimburse my oldest daughter. Virginia 529 delayed the request until December 27th, twelve calendar days after I’d made the request.
The delay was because her account was unfamiliar to Virginia 529. I started another withdrawal on December 28th to the same account and it completed the next day. If you’re making your first withdrawal from your 529, you should plan on the withdrawal taking longer than you might expect. If you’re waiting until the last day of the year to make a withdrawal, you may end up with a withdrawal in the wrong tax year!
Deposit Hold
In addition to withdrawal delays, another wrinkle is how soon deposits are available for withdrawal. This may bite someone making a last minute 529 contribution, hoping to withdraw the money immediately. In my experience using Virginia 529, deposits can't be withdrawn for at least five business days. For example, a deposit I made on September 11th wasn’t available for withdrawal until September 19th, five business days later. If you’re making a last minute contribution that you hope to withdraw immediately, don’t wait until the end of December to make your contribution.
If you run into both of these delays, you could need nearly three weeks between opening a new account and completing the withdrawal. The lesson? Don’t wait until the last few days of December to complete your withdrawal.
Again, all of my experience withdrawing from a 529 account is through Virginia 529. Your 529 plan may have different or additional delays.
Conclusion
Is the “December is for withdrawals” tip a game changer? Nope. It’s a minor tip that can give you a few more months of compounding and additional flexibility when withdrawing from your 529. However, waiting too long to make your withdrawal can potentially cancel out all of the meager benefits of delaying your withdrawals.