The financial cost of education is a challenge for many. Fortunately, a 529 plan may help families save and invest for future education expenses. A 529 plan is a tax-advantaged education savings vehicle commonly used to save for college.
A frequent question we get with each new school year is, "Can I use my 529 plan for this or that?" As summer break comes to an end, below are the types of expenses that qualify for 529 distributions. Did you know that these plans aren’t just for college? As discussed below, 529 distributions can also be used for eligible tuition for K-12 in private and religious schools.
Here's a list of 529 qualified educational expenses:
Education Costs
To take advantage of 529 distributions for education expenses, you must submit your request for the funds during the same calendar year that you incur the qualified education expenses. If you request cash during the academic year and if the calendar year is mismatched, you may end up owing taxes as a non-qualified withdrawal.
- Higher Education - Post-secondary students (after high school) qualify for the use of 529 funds at all colleges and universities that participate in the federal student aid program administered by the U.S. Department of Education. Funds can be used for four- and two-year colleges, graduate programs, and some international institutions.
- Vocational or Trade School - Trade students like culinary students can draw from their 529 accounts to pay expenses related to culinary institute courses. The institution must participate in the U.S. Department of Education for federal student aid.
- Early Education - 529 plan rules allow for up to $10,000 per year to be applied toward private elementary or secondary school tuition expenses. Note that the only qualified expense for K-12 is “tuition.”
Lifestyle and School Supplies
Qualified distributions extend beyond just tuition. Here are some examples.
- Housing - Campus housing can be paid through 529 distributions, including college room and board fees. Off-campus housing rentals qualify up to the same cost of housing on campus.
- Books and Supplies - Paper, pens, and textbooks required by the specific course are qualified expenses. Schools set the budget limit for books and supplies.
- Needs and Services - Special needs equipment and services qualify for 529 distributions. Students using equipment for mobility may be eligible for 529 distribution purchases. Depending on the circumstances, other modes of transportation may also apply.
Technology
Finally, computers and some electronics are included on the list of qualified education expenses. Keep in mind that these items must be required as part of the students' study programs to qualify.
- Personal Computer - Computers must be used primarily by the student during any of the years the student is enrolled at the eligible educational institution.
- Software - Software may qualify as a 529 distribution expense, but only if it's used by the student and required by a class. For example, technical engineering or design classes may involve computerized assignments.
- Internet - Internet access counts as a qualified education expense as long as the beneficiary primarily uses the internet access while enrolled in an eligible educational institution.
When deciding on a 529 savings plan, it’s important to evaluate the fees, expenses, and investment options associated with the plan. Potential tax implications are a consideration too. Availability of state tax deductions will depend on your state of residence, and tax laws can vary between states and from federal regulations. Earnings on non-qualified withdrawals may be subject to income tax and a 10% federal penalty.
These tips should help you get started, but consult with the school and speak with your tax advisor for more information. If you have further questions about 529 plans, your financial advisor can offer additional guidance.