Making the Most of Your 529 College Savings Plan: Understanding Eligible Expenses
You may have heard of 529 college savings plans, but still wonder how the money can be used. 529 plans can have tremendous positive impacts on your son or daughter’s education. The list of 529 eligible expenses can be confusing. Keep reading for more on the many ways 529 plans can be used to help pay for college and other educational goals.
A 529 College Savings Plan provides a way for families to save for education expenses. These unique accounts come with the benefit of tax-free growth and tax-free withdrawals for education costs. Some families can also realize tax benefits for contributions to 529 plans, depending on their state of residence.
One of the best benefits of 529 plans is their flexibility. The potential uses for 529 plans have grown over the years as congress has changed the rules. When used wisely and in line with IRS guidelines, these accounts can be a powerful way to help your children. Keep reading to learn some of the ways your family can use this powerful tool to pay for education costs.
Qualified vs. Non-Qualified 529 Distributions
When you withdraw money from a 529 plan, it’s called a distribution. You can take money out of a 529 plan when you wish and use it for any purpose, but the purpose matters. Because a 529 college savings plan is intended for education, the government will penalize you if the money is not used for an educational purpose. 529 plans, named for section 529 of the Internal Revenue Code, are sometimes referred to as Qualified Tuition Programs. Whether your distribution is qualified makes a significant difference to your family.
"An intelligent heart acquires knowledge, and the ear of the wise seeks knowledge." Proverbs 18:15 ESV
If a distribution is taken to pay for certain educational purposes, then it is considered qualified. When a distribution is qualified, your family will owe no taxes or penalties from the government.
If a distribution is taken that does not meet the IRS criteria, it is then considered non-qualified. Non-qualified distributions are subject to taxes and penalties. If you’re not sure if a distribution is qualified or not, consult a qualified tax professional.
What Counts as a Qualified 529 Expense?
If you're not clear on what can be used as a qualified 529 expense, you're not alone. Rules around 529 plans, just like other IRS rules, are often unclear and not easily accessible. To help, we created the guide below on what qualifies so your family can get the most from your 529 plan. The list below covers tons of ways you can use a 529 plan, but still does not cover every possible circumstance. If you're not sure, seek out help from a qualified professional.
"On the first day of every week, each of you is to put something aside and store it up, as he may prosper, so that there will be no collecting when I come." 1 Corinthians 16:2 ESV
Bachelor's Degrees and Graduate Degrees
529 plans are most often associated with a 4-year degree. Several expenses associated with an undergraduate program may qualify for 529 withdrawals. This eligibility also extends to graduate degrees including Masters and Doctoral level programs.
Tuition
Tuition for a degree program qualifies. Tuition for a bachelor’s degree is one of the most common uses for 529 money. To qualify as a qualified 529 expense, tuition must be for a class that is taken toward a degree program.
Fees
Colleges have gotten into a nasty habit of charging miscellaneous fees. For example, technology fees have become common on many campuses. Some other ridiculous fees include environmental fees, health fees, course fees, wellness fees, student organizations fees, transportation fees, and parking fees. Those fees, even the ludicrous ones, would qualify.
Books
Books purchased or rented for a course qualify. Note that used books also qualify.
Equipment and Supplies
Students will have costs related to their course of study. Equipment and supplies qualify. All students will have expenses for simple necessities like paper and pencils. Others will experience supply and equipment needs specific to their degree program. For example, a music major could use 529 money for an instrument. Alternatively, an art major could use 529 assets for canvas or other supplies related to a class. The key is it needs to be related to an educational purpose.
Room & Board
Room & board is a significant expense that also qualifies for 529 withdrawals. This would include expenses related to on-campus housing like a dorm. Meals provided in a cafeteria or other on-campus location count. IRS rules also allow off-campus housing, but with conditions. Any use of 529 funds must not exceed what they would have paid to live on campus. The student must be considered at least a half-time student and in pursuit of a degree program.
If a student decides to study abroad, room & board may also be eligible while they are away. The program must be approved by the college for course credit.
Computers, Internet, and Software
Technology purchases for the purpose of college qualify. This could include a large purchase like a laptop or tablet. Smaller purchases like a mouse or backup drive would also qualify. If there’s an ongoing expense, such as internet service, that would also qualify provided it’s used for educational purposes. A new phone or your phone bill will generally not qualify.
Special Needs Equipment
Students with special needs may be able to use 529 funds for certain expenses.
Community College, Vocational Schools, and Associate Degrees
Two-year degree programs and other similar programs are possible uses for 529 assets. Trade schools can also qualify.
Tuition
Tuition for community college and associate degrees qualify. For vocational or trade schools, not all programs qualify. A program needs to be eligible for Title IV federal student aid. The Department of Education has free resources with more details.
Fees
Fees for enrollment or other miscellaneous fees related to a program qualify.
Books
Books purchased or rented for a course qualify. Note that used books also qualify.
Equipment and Supplies
Vocational and trade schools are remarkably diverse. If equipment and supplies are purchased for a qualifying program, then they are 529 eligible. For example, if you’re in a culinary program, a new chef’s knife would count. If you’re in a welding program, new safety equipment would qualify.
Computers, Internet, and Software
Technology purchases for the purpose of college qualify. This could include a large purchase like a laptop or tablet. Smaller purchases like a mouse or backup drive would also qualify. If there’s an ongoing expense, such as internet service, that would also qualify provided it’s used for educational purposes. A new phone or phone bill will generally not qualify.
Apprenticeship Programs
Apprentice opportunities can qualify as a 529 use. Keep in mind the apprenticeship program must be accredited, registered, and eligible. To qualify, the program must be registered with the U.S. Department of Labor.
K-12 and Private School Expenses
529 plans were updated in 2017 to allow additional education related expenses to qualify for 529 plan withdrawals. If you’re considering taking advantage of these possible 529 uses, pay close attention to the rules. The IRS rules for K-12 expenses are quite different from uses after high school.
K-12 Tuition
Private and faith-based elementary, middle, and high school tuition qualify for 529 withdrawals. The IRS rules define this as “enrollment or attendance at an elementary or secondary public, private, or religious school.” There is a limit of $10,000 per year, per student.
Dual Enrollment
If a high school student enrolls in a college course to gain college credits, tuition expenses are eligible to be paid with 529 funds. Note this is different from Advanced Placement (AP) classes/test which would not be eligible for 529 distributions.
Homeschool Programs Do Not Qualify
Unfortunately, homeschool programs are not a qualified 529 expense. You may see conflicting information about this on the internet. When 529 plan rules were expanded in 2017, one version of the congressional bill did add homeschool as an eligible option. The final version of the bill and what was codified into the tax code do not allow for 529 withdrawals to be used for homeschool expenses.
SAT and ACT Prep Courses Do Not Qualify
Test prep courses can be pricey, but are not qualified 529 plan expenses. This same limitation applies to other aptitude test like the Classical Learning Test (CLT) as well.
Post-School Expenses and Other Opportunities
A 529 plan can continue to bless your family after college. 529 funds can be used to help with student loan payments, but there’s limitations involved. Under the right circumstances, there may also be an opportunity to help your graduate get a head start saving for retirement.
Limited Payments for the Student
Up to $10,000 can be used to pay for federal and/or private loans for your graduate/beneficiary. The dollar limit is a lifetime limit. This applies to private and/or federal loans.
Limited Payments for Siblings
A 529 plan can also be used to pay for student loan payments for the beneficiary’s siblings. There is a separate $10,000 lifetime limit for each sibling. This applies to private and/or federal loans.
Jumpstart Retirement Savings
If your student has remaining funds in a 529 plan, they may be able to get a head start on saving for retirement.
Rollover to a Roth IRA
Some 529 funds may be eligible to rollover to a Roth IRA. There’s several criteria to consider before taking this step. First, the 529 plan has to have been in existence for 15 years before a rollover can take place. There’s a further limitation that any contributions made in the last five years may not be rolled over to a Roth IRA.
Once those criteria are met, there’s a limitation on how much can be contributed to the Roth IRA. You cannot contribute more in any one year than the normal contribution limit for Roth IRAs. There’s also a lifetime limit of $35,000 that can be moved from a 529 to a Roth.
For those that qualify, this can be a leap forward to retirement savings that will grow tax-free over many decades.
A 529 Plan Can Be a Versatile Tool
529 college savings plans can be a powerful tool for your family’s educational ambitions. The impact can be far reaching. The unique accounts can affect your family from kindergarten to college and even beyond graduation. We’ve shared only a portion of the ways your son or daughter can benefit from a 529 plan. Take care to use this tool wisely and the seeds you plant will bear fruit for decades to come.
10 Powerful Facts Every Family Should Know About Saving for College with a 529 Plan
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