Learn more about what the savings in a 529 plan can help pay for.
529 plans are valuable education savings tools – they allow you to invest after-tax dollars in an account that will grow tax-deferred and can be distributed tax-free for qualified expenses. However, it’s important to understand which expenses are qualified and which ones aren’t.
WHICH EXPENSES ARE QUALIFIED?
In association with an eligible institution (any college, university, vocational school or other post-secondary educational institution that qualifies for federal financial aid), the following expenses are considered qualified:
- Tuition and fees
- Books, supplies, computers and peripheral equipment
- Room and board (if attending school more than half-time)
- For special needs beneficiaries, expenses for special needs services incurred in connection with enrollment or attendance
In participating states, tuition expenses up to $10,000 per year per beneficiary are considered qualified for an elementary or secondary public, private or religious school. Qualified expenses for K-12 education are currently limited to tuition, however – meaning 529 funds can’t be distributed tax-free to cover the cost of computers, homeschooling or other virtual learning tools for K-12 students.
College entrance exams such as the SAT and ACT are also not considered qualified expenses for 529 plans. However, if a prep course is considered K-12 education, the cost could be considered qualified. Note that this would not include exam fees or materials.
EXPENSES BEYOND THE BOOKS
Room and board, off-campus housing and food costs
529 plans can be used for room and board, off-campus housing and food expenses as long as the student is enrolled at least half-time as defined by the school. Additionally, these expenses are generally limited by the institution’s cost of attendance, which can be found on the school’s website or by contacting its finance department.
For off-campus housing costs, the IRS relies on each school to set the maximum dollar amount to allow for a variance in cost of living around the country.
Food expenses and meal plans (which fall within the “board” section of room and board) are a frequent use for 529 savings because of the ease of documentation. The funds can be used to buy groceries and other meals, so long as proper documentation of the receipts is maintained.
While joining a fraternity or sorority can be a beneficial part of a student’s college experience, dues as a whole are not considered a qualified expense. However, if the student lives in and/or has a meal plan at the fraternity or sorority house, those expenses can be covered as room and board with the same limitations noted above.
Travel expenses to and from school are not considered qualified. This means a student’s car and related expenses aren’t qualified, nor are plane or train tickets associated with studying abroad.
While scholarships aren’t a qualified expense, they do have special tax treatment. Normally, if you withdraw money from a 529 plan for a non-qualified expense, you will owe ordinary income tax and a 10% penalty on the earnings portion of the withdrawal. In the case of a scholarship, however, you can withdraw the amount of the scholarship without paying the 10% penalty.
This strategy is typically used if other qualified expenses won’t be sufficient to spend the entire account value. If you’re able to use the funds for qualified expenses, there will not be any penalty or income tax associated with the withdrawal. Similar waivers are provided for employer-provided assistance and death or disability of the beneficiary.
As a result of the SECURE Act, 529 plan funds can now be used to pay off student debt – up to a $10,000 lifetime maximum for the plan’s beneficiary, plus up to $10,000 toward each sibling’s lifetime maximum. Note that investors aren’t allowed to “double dip” from a tax perspective by using tax-advantaged 529 funds to pay down student loans and taking a deduction for the interest.
If the beneficiary is attending a foreign school, it must be considered qualified to use 529 dollars without tax or penalty. About 400 schools outside of the United States are considered qualified. You can look up eligible institutions by using the “Look Up a School Code” resource on the Department of Education’s Federal Student Aid website. Note that you may need to choose “Foreign Country” as the state.
This is for informational purposes and is not intended to be tax advice. Please consult with a tax advisor for specific questions regarding qualified expenses. Additional details can also be found in IRS Publication 970.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.