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
|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|
No, costs associated with transportation to and from campus, such as airplane travel or automotive expenses, are not qualified education expenses
No, even health insurance policies offered by a school are not considered qualified
Student loan payments
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.
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