What you can pay for with a 529 plan

Martha Kortiak MertBy: Martha Kortiak Mert | 

You may already know that you won’t pay federal taxes on withdrawals from a 529 plan as long as you are using the funds to pay for qualified education expenses. But if you aren’t sure what counts as a qualified education expense, you’re not alone. So what exactly can you pay for with your 529 plan, while enjoying the full tax benefits of the plan?

In general, costs required to attend a college, university or other eligible post-secondary educational institution are considered qualified higher education expenses. In other words, you can withdraw funds tax-free from your 529 plan to pay these expenses. Starting January 1, 2018, the definition of qualified higher education expenses (for tax purposes) is expanded to include tuition for K-12 schools, as a result of the 2017 Tax Cuts and Jobs Act. However, the new law limits qualified 529 withdrawals for eligible K-12 tuition to $10,000 per beneficiary per year.

Remember, you can always withdraw money from a 529 plan for any reason, but if the withdrawals are non-qualified, you may be subject to paying a penalty and taxes on any earnings.

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

Book and supplies

For college expenses only

Computers and related equipment and services (e.g., 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 costs

No, costs associated with transportation to and from campus, such as airplane travel or automotive expenses, are not qualified education expenses

Health insurance

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

Student loan payments

No


Special needs equipment refers to equipment that is necessary for a student with special needs to enroll at a college or university.

It’s worth noting that 529 plans can also 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. 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.

For families claiming other education tax benefits, such as the American Opportunity Tax Credit (AOTC), remember that there is no double-dipping. Your maximum tax-free withdrawal will be the total amount of higher education expenses paid during the year, minus the amount used to generate the AOTC ($4,000 if claiming the maximum $2,500 credit).

Your accountant or tax advisor may be able to provide more guidance on your specific situation.

Martha Kortiak Mert

Martha Kortiak Mert

Chief Growth Officer, Savingforcollege.com

Martha is Chief Growth Officer for Savingforcollege.com, where she leads initiatives to bring innovative solutions to consumers and professionals in the college savings marketplace. Previously, Martha had a successful career developing marketing and customer strategies for Fortune 500 and start-up companies in financial services, digital media, retail and consumer products. She received her MBA from the Anderson School at UCLA and her BSFS in International Economics from Georgetown University.