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.
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:
In participating states, tuition expenses up to $10,000 per year per beneficiary are also considered qualified for an elementary or secondary public, private or religious school. Qualified expenses for K-12 education are currently limited to tuition, however.
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.
Currently, student loans are not considered a qualified expense. While several bills have been proposed to change this limitation, none have yet passed. However, if a student loan is taken out to pay for qualified expenses and in the same tax year 529 funds are withdrawn for the same qualified expense amount, the amount can be considered qualified. It’s not a qualified expense because of the student loan itself, but because there are receipts for qualified expenses to match the total number of distributions in the same tax year. If you are considering paying expenses from prior tax years, seek the opinion of a tax advisor.
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.
SAT/ACT Exams and Prep Courses
College entrance exams are not considered qualified expenses for 529 plans. However, given the recent addition of K-12 tuition, 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.
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.