A 529 college savings plan may be used to pay for the beneficiary’s graduate or professional school education and lessen the reliance on student loans. A distribution to pay for qualified education expenses at a graduate or professional school will be considered a qualified distribution and, therefore, tax-free.
Which Graduate and Professional Schools Are Eligible?
Eligible educational institutions include any college or university eligible for Title IV federal student aid. This includes most graduate schools, professional schools in the U.S., and some foreign institutions. This includes medical schools, law schools, and business schools. All graduate and professional degrees are eligible, including Master’s degrees (e.g., MSW, MBA, MA, and MS), doctoral degrees (e.g., Ph.D., and EdD), medical degrees (e.g., MD, DO, DVM, and PharmD), and law degrees (e.g., JD and LLB).
To determine whether a graduate or professional institution is an eligible school, look for the school’s Federal School Code on its website. Note that graduate and professional schools often have a different Federal School Code than undergraduate institutions. You can also use the Federal School Code Lookup tool on Savingforcollege.com.
Which Expenses Are Eligible?
To take advantage of the tax-advantaged nature of 529 plans, you must have qualified higher education expenses that meet the requirements for tax-free withdrawals. The requirements are the same at a graduate or professional school as at an undergraduate school. The 529 plan qualifying college expenses include:
- Tuition and fees, books, supplies, and equipment required for enrollment or attendance of the beneficiary at the graduate or professional school
- Special needs expenses
- Expenses for the purchase of a computer (including peripheral equipment, software and internet access)
- Room and board, if the student is enrolled on at least a half-time basis
If you withdraw funds from your 529 plan for expenses that aren’t qualified, you’ll be responsible for paying income tax on the earnings portion of the withdrawal plus a 10% penalty.
When Do Families Use 529 Plans for Graduate or Professional School?
A 529 plan is often used to pay for graduate or professional school when there is leftover money from the beneficiary’s undergraduate education.
If you find yourself in that situation and want to put the leftover funds toward graduate school, you should review your 529 investments. If you have invested the 529 funds in an age-based or enrollment year option, it is likely to be in conservative investments by the time the student turns 18 years old. That’s because these portfolios are designed to reduce investment volatility and preserve earnings during the years when a family needs to make withdrawals.
Account owners can make changes to investments in a 529 plan twice per year. Will your student be starting graduate school right away? Or is there likely to be a pause for a few years? Depending on the time horizon, you may want to adjust your investments to increase exposure to equity funds and potentially improve your investment returns in the interim. Remember, though, that this will increase your investment risk in the case of a market downturn.
Families can also use leftover funds in a 529 plan to pay for graduate school for a sibling or themselves. If someone other than the original beneficiary has plans for graduate school, the account owner can change the beneficiary to another relative or even themselves and use the leftover funds to pay for their graduate or professional school education.
