What you can pay for with a 529 plan

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Martha Kortiak Mert

By Martha Kortiak Mert

February 17, 2021

A 529 plan is a powerful tool that parents and family members can use to save for a child’s education. Contributing to a 529 plan offers tax advantages when the money in the account is used for qualified education expenses. However, there are many 529 plan rules to understand.

Understanding the 529 rules and how they’ll impact your education savings is important to get the most out of your 529 plan.

So, let’s get into it.

What you can pay for with a 529 plan

First off, let’s dive into the qualified expenses of a 529 plan.

Money invested in a 529 college savings 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 (more on that in a minute, though).

Qualified higher education expenses include costs required for the enrollment or attendance at a college, university or other eligible post-secondary educational institution. The definition of qualified higher education expenses (for 529 plan purposes) also includes up to $10,000 per year in tuition for K-12 schools and up to $10,000 in student loan repayments .

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, up to the full amount of college tuition and required fees. 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 loans

Yes, with a lifetime limit of $10,000

Wondering how your 529 plan may impact financial aid? Use our Financial Aid Calculator to estimate the expected family contribution (EFC) and your financial need.

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It’s worth noting the rules for some of these expenses are a bit more complicated than others. 

To help you understand exactly what you can pay for with a 529 plan, let’s break down each expense.

Tuition and fees

A 529 plan is a college savings plan that’s specifically designed to support students and their families pay for college tuition. That means the funds you accumulate in a 529 plan can be used to pay the full amount of your college tuition fees and most subsequent university fees that are required for you to enroll and attend.

Attendance does not necessarily need to be physical. You can also use a 529 plan to pay for online college courses. 

As long as the college you’re enrolling in is an eligible institution (which means that the institution is eligible for Title IV federal student aid), you can use a 529 plan to pay for online tuition and fees.

But a 529 plan isn’t limited to just college tuition fees

Thanks to the Tax Cuts and Jobs Act that came into effect in December 2017, families can also use a 529 plan to pay for up to $10,000 worth of tuition expenses per year at an elementary or secondary school. This includes public, private, and parochial schools.

These changes came into force on January 1, 2018.

Tuition costs at many trade schools are also considered qualified 529 plan expenses, meaning you can withdraw the money tax-free from a 529 plan to pay those costs.

Books and supplies

If books and supplies are required to participate in a class, the full cost of those books and supplies are considered a qualified expense. This may include course textbooks, lab materials, safety equipment, or anything else that is absolutely mandatory for your coursework.

By contrast, you can’t claim for books and supplies that aren’t required. 

For example, let’s say you’re taking a marine biology class and you decide you’d like to do some additional reading up on whales. Unfortunately, if the extra books you’d like to buy aren’t on the class reading list, you won’t be able to use a 529 plan to pay for them.

Computers and internet access

You can use your 529 plan to purchase a computer, “peripheral equipment” (like a mouse or speakers), computer software or internet access. 

According to the Internal Revenue Service (IRS), computers and internet access count as a qualified education expense as long as that hardware (or internet access) is primarily used by the beneficiary while they’re enrolled in an eligible institution.

It’s important to note the IRS specifically states computer software that has nothing to do with your studies doesn’t count as a qualified expense. That means computer games, sports software, or any apps related to a hobby can’t be paid for using a 529 plan. 

Room and board

A 529 college savings plan can be used to pay for some qualified room and board expenses like rent or other housing costs. This applies to both on-campus and off-campus room and board, as long as the costs were incurred during an academic period where you’re enrolled.

That being said, there are a couple of extra rules you’ve got to remember.

First, you can use a 529 plan to pay for off-campus and non university-managed accommodation as long as the beneficiary is enrolled in an eligible college program on at least a half-time basis. That student must also be studying towards a degree, certificate, or another recognized credential.

You also need to understand that off-campus students are limited to the allowance reported by the college in its “cost of attendance” figures. Any amount above the allowance is considered a non-qualified 529 plan expense. 

Studying abroad? Room and board costs incurred in a study abroad program counts as long as it’s approved for credit by your home college or university. 

Rent incurred during the summer months is also considered qualified when the student is enrolled at least half-time.

While a 529 college savings plan can be used to pay for room and board in some instances, Prepaid tuition plans like the Private College 529 Plan generally cannot be used to pay for room and board.

That means if your family is using a prepaid tuition plan, you might want to think about setting up a 529 college savings plan so that you can save for extra expenses like room and board.

Special needs equipment

Special needs equipment refers to services that are necessary for a student with disabilities or other special needs to attend college or university. If you genuinely require special needs equipment to enroll and participate in a course at an eligible institution, these costs can be met using your 529 plan.

Again, a 529 plan can only be used to help pay for special needs services if the costs were incurred in connection with enrollment or attendance at a qualified 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

Transportation and travel costs, like gas and transit passes, are generally not considered qualified 529 plan expenses.

That means you cannot use a 529 plan to buy or rent a car, maintain a vehicle or pay for any other travel cost. If you do use a 529 distribution to pay for this type of expense, those distributions are considered non-qualified. 

An exception to this rule may be if your college charges a travel or transportation cost as part of a comprehensive tuition fee, or if that fee is identified as being required for enrollment or attendance.

Health insurance

Your college may likely require students to have health insurance. However, you can’t use a 529 to pay for health insurance. If your college requires you to have health insurance, you’ll typically get a waiver on that requirement if you’re covered under your parent’s health insurance plan.

Again, there is an exception to this rule. If health insurance is charged by your institution as part of a comprehensive tuition fee (or the fee is required to your enrollment or attendance), the cost of your health insurance may count as a qualified 529 plan expense.

College application and testing fees

Any costs incurred prior to the student’s admission to a college or university, such as college application and testing fees, are not considered qualified expenses. 

Although these costs are required for admission, they are not required for enrollment or attendance.

If 529 plan funds are used to pay for any pre-enrollment fees, it will be considered a non-qualified distribution.

Student loan payments

If you have leftover money in your 529 college savings plan after you graduate, you can use that money to pay off all or part of your student loan debt.

This change was introduced as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was signed by President Trump and introduced in 2019.

The SECURE Act applies to all 529 plan distributions that were made after December 31, 2018.

Because there aren’t imposed time limits on 529 plans, you can keep your 529 plan open after plan after you graduate and use any leftover money to repay student loans.

But again, there is an important rule you’ve got to remember: the law only allows you to pay off a lifetime limit of $10,000 in qualified student loan repayments using your 529 plan. That means if you owe more than $10,000 in student loans, you can only use your 529 plan to pay for that first $10,000.

How to calculate 529 plan qualified expenses

The maximum amount that can be withdrawn tax-free from a 529 plan is the total amount of higher education expenses paid during the year, minus any amount used to generate other federal tax benefits.

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 income requirements.

The AOTC offers a 100% credit for the first $2,000 used to pay for education expenses and 25% for the next $2,000 used, for a maximum credit of $2,500 if you spend $4,000 on qualified expenses.

Money in a 529 plan can only be withdrawn tax-free when used for qualified expenses that were not covered by payments that generated the AOTC. So, in this scenario, the taxpayer would subtract $4,000 from the qualified educational expenses they paid when determining how much they should withdraw from their 529 plan.

The credit does phase out at higher incomes, so some families may get a smaller credit or not be eligible at all. An accountant or tax advisor may be able to provide more guidance on your specific situation.

In order for an expense to be qualified, you must withdraw money from the 529 plan in the year the expense was incurred. You can’t incur an expense in one year and withdraw from the 529 plan in a different year.

529 Plans and Taxes

The primary benefit of using a 529 plan for college saving is that the accounts offer tax advantages. The rules surrounding these tax benefits can be complex and vary based on where you live.

Similar to a 401(k) 529 plans are investment accounts, and the contributions you make are invested in a portfolio of mutual funds or other securities that may generate income. But, unlike a 401(k), contributions to a 529 plan are made with after-tax money.

What does all that mean?

Simply put, it means that although the money you put into a 529 plan isn’t tax deductible, the earnings in your 529 can grow tax-deferred and won’t be taxed the federal or state level when you make a withdrawal for a qualified education expense.

State-level income tax benefits can vary. Some states don’t offer any perks for using a 529 plan, while others will let you deduct a portion of your contributions from your state taxable income. For example, Massachusetts lets you deduct up to $1,000 in 529 plan contributions ($2,000 if married, filing jointly) from your state taxable income. 

Also, keep in mind that you can use another state’s 529 plan if your state doesn’t offer a tax benefit, or if another state’s 529 plan offers lower fees or better investment returns. It’s important to do your homework and research all of your options first. To learn more about each state’s 529 plan tax benefits, check out our guide.

What Happens if the Account Beneficiary Doesn’t Go to College?

529 plans are designed to help students pay for an education — but not everyone goes to college. 62% of men and 69.8% of women who graduate high school go on to college, but that means millions of Americans decide not to pursue higher education.

If you open a 529 plan for someone who decides not to go to college, there are a few options for using the money.

One is to simply take the money out of the 529 plan and to use it for non-educational expenses. However, if you use a 529 for non-qualified expenses, you have to pay a 10% penalty and income tax on the earnings portion of the withdrawal.

Another option is to change the beneficiary of the account. 

The account owner can name a new beneficiary and use the money to pay for their education. For example, a parent who has two children could change the account beneficiary to their other child and use the money for their benefit.

As long as the new beneficiary is a family member of the account owner, changing the beneficiary won’t have any tax implications. Most 529 plans allow beneficiary changes at any time by completing a form found on their website.

It’s important to note 529 plans are designed for education — but that doesn’t mean they can only be used for college. Trade schools and vocational schools can also qualify. If someone doesn’t think college is the right choice for them but wants to study a trade, money in a 529 plan can cover those costs.

Other options include using money in the 529 plan to pay off student loans and saving the money to go toward graduate school or other further education.

The owner of the 529 plan can also change the beneficiary of the account, and use the money to pay for their own education, another family member’s education, or save it for a grandchild.

What Happens if You Use a 529 Plan for Non-Qualified Expenses?

You can withdraw funds from your 529 plan at any time, for any reason, but the earnings portion of a non-qualified distribution may be subject to taxes and a penalty,

Money in a 529 plan also grows tax-deferred. You don’t have to pay federal income tax or capital gains taxes if your investments gain value in your 529 plan. If you spend the money on a qualified higher education expense, your withdrawal is tax-free.

But don’t forget: if you withdraw money for non-qualified expenses, you will incur income taxes on the earnings portion of the distribution. You also have to pay an additional 10% penalty on those earnings.

States can impose additional penalties. 

For example, California adds a 2.5% tax penalty to the 10% federal tax penalty. States that offer state income tax deductions for 529 plan contributions may also make you pay the taxes you would have owed if you didn’t receive those deductions.

However, here are exceptions to the penalty rules. For example, you may be able to take money from the account for non-qualified expenses if you’re attending a military academy, earn a qualifying scholarship or receive educational tax credits.

It’s important to understand the rules and your options. For more information on exceptions to the penalty rules, consult our guide.

How Long Can You Leave Money in a 529 Plan?

Some tax-advantaged accounts have rules about how long money can stay in the account. One of the best-known examples of this is the Required Minimum Distribution (RMD) rule for 401(k)s and IRAs. It’s natural to wonder if 529 plans have similar rules.

The good news for savers is that 529 plans don’t have any limits or restrictions on how long money can remain in the account. The only rule is that the account must have a named, living beneficiary. You can open a 529 plan for a child when they’re born and keep money in the account until they’re 80 years old or older.

Education doesn’t stop when you graduate college. You can always go back to school to learn new skills or simply because you enjoy learning. You can keep using a 529 plan throughout your life if you want to save for future education.

In fact, with the flexibility to change beneficiaries, you can keep a single 529 plan open for a long time and use it to benefit multiple members of your family.

Conclusion

529 plans can play an important role in your college savings plan to pay for your own or your children’s education. Understanding 529 plan rules can help you maximize your college savings and take advantage of some lucrative tax benefits.

If you’re looking for more information, be sure to check out your state’s 529 plan details.

A good place to start:

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