It's that time of year again. Tuition bills for the fall semester are arriving, and you may have questions about how to use your 529 plan to help cover education expenses. To help you make the most of your 529 plan, we’ve answered some of the most common questions about qualified expenses and distributions.
What Can You Buy With 529 Distributions?
Educational Strategy
To ensure a tax-free withdrawal, 529 distributions should be made in the same tax year that qualified education expenses are paid. Be sure to keep records showing that the distribution and the qualified expense occurred during the same calendar year.
- Higher Education - 529 funds can generally be used at any eligible post-secondary (post-high-school) institution that participates in federal student aid programs administered by the U.S. Department of Education.
- Vocational or Trade School - Students attending eligible trade, technical, vocational, or culinary schools may also use 529 funds to cover qualified education expenses, provided the institution participates in federal student aid programs.
- Early Education - 529 plans can now be used for up to $20,000 per student, per year for K-12 education expenses. In addition to tuition at public, private, and religious schools, recent federal law changes expanded the list of eligible K-12 expenses to include certain curriculum materials, books, tutoring, testing fees, dual-enrollment costs, and educational therapies for students with disabilities. State tax treatment may vary, so be sure to review your state's rules before taking a distribution.
Lifestyle and School Supplies
As school expenses add up, it helps to know which costs can be covered with 529 funds and which ones should stay in your regular budget.
- Housing - Campus housing can be paid through 529 distributions, including college room and board fees. For students living off campus, rent and other housing expenses may qualify up to the school's published cost-of-attendance allowance for room and board.
- Books and Supplies - Required textbooks, course materials, paper, pens, notebooks, and other supplies needed for enrollment or attendance generally qualify as education expenses.
- Special Needs Services - Special needs equipment and services required by a beneficiary with special needs are considered qualified expenses and may be paid with 529 funds.
Technology Expenses
Many families are surprised to learn that technology expenses can be qualified education expenses.
- Personal Computer - Computers and laptops generally qualify when used primarily by a student attending an eligible educational institution.
- Software - Educational software and programs used by the student may qualify, particularly when needed for coursework or academic instruction.
- Internet - Internet access and related services generally qualify when primarily used by the student during enrollment at an eligible educational institution.
The above tips are sure to help you get started but make sure to check with the school and your financial professional to learn more. Each state and school may have different restrictions on the use of 529 funds. If you are unsure about anything, your plan sponsor may be able to provide some guidance.
What Doesn’t Qualify?
While it is important to know what qualifies under a 529, it is equally important to understand what does not qualify.
Common non-qualified expenses include:
- Transportation and commuting costs
- Car payments and vehicle expenses
- Health insurance premiums
- Gym memberships
- Entertainment expenses
- Fraternity or sorority dues
- Most cell phone expenses
- Travel costs not specifically included in a school's cost of attendance
Using 529 assets for non-qualified expenses may result in income taxes and a 10% federal penalty on the earnings portion of the withdrawal.
What if my student gets a scholarship?
A common concern among parents is what happens if their student receives a scholarship.
The good news is that there is a scholarship exception to the 10% federal penalty. You may withdraw an amount equal to the scholarship from the 529 account without paying the additional 10% penalty that normally applies to non-qualified withdrawals. However, any earnings included in the withdrawal will still be subject to ordinary income tax.
Be sure to keep documentation of the scholarship with your tax records.
It's also important to remember that you are not required to withdraw the funds. Many families choose to:
- Leave the money invested for future years of college
- Save the funds for graduate school
- Change the beneficiary to another eligible family member
- Use the assets for other qualified education expenses
- Preserve the account for future planning opportunities
Who can use a 529 plan to repay student loans?
529 plans may also offer flexibility after college, including the ability to use unused funds to help repay certain student loans.
529 plans can be used to repay qualified student loans for:
- The beneficiary (student)
- Each of the beneficiary's siblings
Both principal and interest payments qualify.
The lifetime limit is $10,000 per individual, meaning a beneficiary and each sibling may each have up to $10,000 of student loans repaid using 529 assets.
Families should also be aware that using 529 funds to pay student loan interest may affect eligibility for the student loan interest deduction.
What If My Child Doesn't Use All the Money?
One of the biggest concerns about 529 plans is having leftover funds.
Subject to IRS requirements, eligible 529 assets may be rolled into a Roth IRA for the beneficiary without taxes or penalties. Current rules allow lifetime Roth IRA rollovers of up to $35,000, subject to annual contribution limits and other eligibility requirements.
This option has made 529 plans more flexible than ever by helping families avoid concerns about overfunding an account.
Does my account affect eligibility for federal financial aid?
Like any non-retirement investment or savings, 529 accounts may affect eligibility for need-based financial aid however, the impact is minimal.
For accounts owned by parents and dependent students, the Free Application for Federal Student Aid (FAFSA) assesses 529 assets at about 5.64 percent of the value when calculating the Student Aid Index (SAI) for financial aid eligibility. Accounts owned by other parties will impact eligibility differently. For more information, consult studentaid.gov or an educational financial aid advisor.
Keep Good Records
You should retain receipts, billing statements, scholarship documentation, and other records showing that 529 distributions were used for qualified expenses. Good recordkeeping can help support the tax-free treatment of your distributions if questions arise later.
Making the Most of Your 529 Plan
529 plans remain one of the most flexible and tax-efficient ways to save for education. From tuition and housing expenses to books, technology, student loan repayment, and even Roth IRA rollovers, understanding what qualifies can help families maximize the value of their savings while avoiding unnecessary taxes and penalties. If you're unsure whether an expense qualifies or would like guidance on how to incorporate your 529 plan into your family's broader financial plan, reach out to your financial planner at EBW.
Sources:
https://www.capitalgroup.com/advisor/account-resource-center/collegeamerica/qualified-expenses.html
nvestors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state's 529 Plan.