What you can pay for with a 529 plan

Martha Kortiak MertBy:  Martha Kortiak MertBy: Savingforcollege.com

What you can pay for with a 529 plan

Martha Kortiak MertBy:  Martha Kortiak MertBy: Savingforcollege.com

Parents can withdraw money from a 529 plan at any time for any reason. However, the earnings portion of a non-qualified distribution will incur income tax and a 10% penalty. To enjoy the full tax benefits of a 529 plan, funds must be used to pay for qualified higher education expenses.

529 plan qualified expenses

Money invested in a 529 plan grows tax-deferred, and qualified distributions are tax-free. Families may also be eligible for a state income tax deduction or credit for 529 plan contributions, depending on where they live.

Qualified 529 plan expenses include costs required for the enrollment or attendance at a college, university or other eligible post-secondary educational institution. Starting January 1, 2018, the definition of qualified higher education expenses (for tax purposes) is expanded to include up to $10,000 per year in tuition for K-12 schools, as a result of the 2017 Tax Cuts and Jobs Act.

Here is a list of common educational expenses and their qualification status:

Type of expense

Is it a qualified education expense?

Tuition and fees

Yes, limited to $10,000 per year for K-12

Books and supplies

For college expenses only

Computers and internet access

For college expenses only

Room and board

For college expenses only, if the student is enrolled at least half-time

Special needs equipment

For college expenses only

Transportation and travel costs

No, costs associated with transportation to and from campus, such as airfare or gas, are not qualified education expenses

Health insurance

No, even health insurance policies offered by a school are not considered qualified expenses

College application and testing fees

No

Extracurricular activity fees

No

Student loan payments

No


529 plans can be used to pay for rent for students who do not live on campus, as long as the student is enrolled at least half-time and is seeking a degree, certificate or other recognized credential. Qualified room and board expenses for an off-campus student are limited to the allowance reported by the college in its “cost of attendance” figures.

Special needs equipment refers to equipment that is necessary for a student with special needs to enroll at a college or university. Families with special needs may also consider using a 529 ABLE account to save for college and other education expenses.

Transportation and travel costs are included in a college’s official cost of attendance, but they are not considered qualified 529 plan expenses.

Costs incurred prior to the student’s admission to a college or university, such as college application and testing fees, are also not considered qualified expenses. Although these costs are required for admission, they are not required for enrollment or attendance.

How to calculate 529 plan qualified expenses

Parents who use 529 plans to pay for college may be eligible for additional tax savings with the American Opportunity Tax Credit (AOTC) or Lifetime Learning Tax Credit (LLTC). However, these federal education tax credits are only available for families who meet certain income requirements, and there is no double-dipping with 529 plan tax benefits.

The maximum amount that can be withdrawn tax-free from a 529 plan will be the total amount of higher education expenses paid during the year, minus any amount used to generate the AOTC or LLTC. For example, parents would subtract $4,000 from total qualified education expenses if they are claiming the maximum $2,500 AOTC credit. An accountant or tax advisor may be able to provide more guidance on your specific situation.

Didn't find an answer to your question above? Check out this article on what you can't pay for with a 529 plan.

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Find a 529 Plan. Select your state below.

Did you know that residents are not limited to investing in their own state’s plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state’s plan and other options.


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