529 plans aren't just for children. Adults returning to college can use a 529 plan to pay for continuing education, undergraduate courses or graduate courses offered at an eligible college or university. Parents may use leftover funds in a child’s 529 plan account, or adults can open their own 529 plan account to pay for qualified higher education expenses. Residents of some states are eligible for a state income tax deduction or credit for 529 plan contributions, no matter how long the funds are held in the 529 plan account.
529 plans for adults
In most cases, the 529 plan account owner can name any U.S. citizen or resident alien with a Social Security number or taxpayer identification number as the beneficiary, regardless of their age. The 529 plan account owner and the beneficiary can even be the same person.
If a child has leftover money in their 529 plan account after finishing college, or decides not to go to college, their parent can use the funds to continue their own education. Parents can change the beneficiary to themselves by completing a form found on the plan’s website. However, the beneficiary cannot be changed to a parent if the 529 plan is a custodial 529 plan.
Adults returning to college can also set up their own 529 plan account the same way one would set up a 529 plan for a child, except they would name themselves as the beneficiary.
529 plan qualified expenses
For adult learners, qualified 529 plan expenses include tuition, fees, and required books, supplies and equipment.
The classes must be provided by a college or university that is eligible for Title IV federal student aid. This includes community college courses and undergraduate and graduate degree programs. Prospective students can use the Federal School Code Lookup tool to find out if a particular college is recognized as an eligible institution.
Study abroad is an option. However, travel costs are not considered to be qualified expenses.
Degree and certificate programs are not required
The 529 plan beneficiary does not have to be enrolled in a degree or certificate program for most tuition and related expenses to be considered qualified.
However, there is one exception, and that is room and board. Room and board costs are considered qualified expenses only if the beneficiary is enrolled at least half time and is pursuing a degree or certificate. Qualified room and board costs include on-campus housing and off-campus housing, up to the amount of the college’s allowance for room and board in the college’s student budget for living off-campus.
529 plan state income tax benefits
In some states, adult students may be able to reduce their state income taxes by funneling their tuition payments through a 529 plan. This can be like getting a discount on tuition.
Residents of more than 30 states are eligible for a state income tax deduction or credit for contributions to a 529 plan. Most states require residents to use their home state’s 529 plan to qualify for the income tax benefit, but Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania offer a state income tax benefit for contributions to any state’s 529 plan.
With the exception of four states (Michigan, Minnesota, Montana and Wisconsin), funds are not required to be held in a 529 plan account for any specified amount of time to be eligible for a state income tax benefit. A student may claim a state income tax deduction or credit even when they make a 529 plan contribution and immediately withdraw the funds to pay for college.
No double-dipping with the Lifetime Learning Tax Credit
Adults continuing their education may qualify for a maximum $2,000 federal tax credit through the Lifetime Learning Tax Credit. In 2019, taxpayers with a modified adjusted gross income (MAGI) of $68,000 or less ($136,000 if married filing jointly) may claim a 20% tax credit on up to $10,000 in combined tuition and mandatory fees for themselves, their spouse and dependent children. The amount of the tax credit is reduced for taxpayers with MAGIs between $58,000 and $68,000 ($116,000 and $136,000).
Unlike the American Opportunity Tax Credit, the Lifetime Learning Tax Credit does not require the student to be enrolled in a degree program at least half time, and there is no limit on the number of years the credit may be claimed.
However, the IRS does not allow double-dipping when it comes to federal tax benefits. Any expenses used to generate the Lifetime Learning Tax Credit cannot be included in qualified expenses to justify a tax-free 529 plan distribution. For example, students who receive the full $2,000 tax credit must subtract $10,000 from their total 529 plan qualified expenses.