Can 529 savings be used to pay for summer courses?

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In most cases, we've found that using a 529 savings plan is the best way to save for the rising costs of college. With this type of investment account families benefit from federal tax-free earnings growth and may receive additional state tax benefits, as long as the withdrawals are spent on qualified higher education expenses (QHEE). However, it's important to understand what expenses are considered qualified because non-qualified purchases will be subject to income tax as well as a 10% penalty tax. Most schools will provide information on these expenses for a standard nine-month school year, but what about when your child wants to take summer classes?

Taking summer courses is a great way for students to get ahead and possibly graduate sooner. You can also significantly reduce tuition costs if classes are taken at a community college. And yes, you can pay for most summer classes with 529 savings and still maximize the tax benefits. Here are some things to consider:

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In order for room and board costs to be considered qualified, the student must be enrolled at least half-time

At most colleges and universities, a student is considered half time if they are enrolled in at least six credit hours per term. While six hours may not seem like that much, remember that a summer session tends to be shorter than fall or spring semesters, often only around eight weeks long. Students typically meet twice per week for one class, which means taking more courses won't leave much time for homework or a part-time job. Sometimes there are fewer options available to choose from during the summer, which may also make it difficult to achieve half-time status.

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Calculate the cost of summer attendance

Colleges and Universities generally list tuition and room and board costs on their website. For example, the University of Florida (UF) lists a tuition/ fees cost of $6,630 for resident undergrads (non-residents can add $22,278 to this amount) and a housing cost of $5,340. However, these figures represent a standard 9-month school year and do not include summer months. While the University of Florida also lists the cost of summer attendance separately, many schools do not, leaving parents wondering just how much they should withdraw from their 529 plan to take full advantage of the tax benefits.

Distributions beyond the amount of QHEEs will be subject to income taxes and the 10% penalty. To prevent this from happening when the cost of summer school is not known, you can use the following calculations to determine your prorated costs of attendance.

Prorated Cost of Attendance (COA)

{Number of months of summer enrollment / 9 months (standard annual enrollment)} X Standard 9 month COA = Prorated COA for summer months

{Standard 9 month COA / 9 months (standard annual enrollment)} X Number of months of summer enrollment = Prorated COA for summer months

For example: If your child's school allotted $6,000 for housing in the normal 9-month cost of attendance and your child was attending summer class for 3 months:

3 months / 9 months X $6,000 = $2,000 allotted for summer housing, which would be considered a QHEE.

$6,000 / 9 months X 3 months = $2,000 allotted for summer housing, which would be considered a QHEE.

These figures represent amounts that you can likely withdraw from a 529 plan as a tax-free distribution. Of course, these are simply estimates of QHEE amounts and it is always best to contact your child's school for the actual costs.

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Determine the total amount of your qualified expenses

In addition to tuition and housing, QHEEs include other expenses required for summer course enrollment such as books, supplies and software and services for special needs students. One thing to keep in mind is whether you or your child are planning on claiming other education tax benefits like the American Opportunity Tax Credit or the Lifetime Learning Credit. Because of coordination (anti-double-dipping) rules, you must subtract the amount of tuition expense that was used to generate the annual education tax credit from your total QHEE. The resulting figure is called the adjusted QHEE, or AQHEE.

For example, let's say this year you plan on claiming $2,500 under the American Opportunity Tax Credit (AOTC). The AOTC allows parents of students who are enrolled in college at least half time to claim a tax credit for 100% of the first $2,000 and 25% of the next $2,000 of tuition and mandatory fees, for a maximum of $2,500 annually per child. The credit cannot be claimed for more than four tax years per child, and for married taxpayers filing jointly the credit is phased out for incomes between $160,000 and $180,000.

That means you would have to use $4,000 of your annual tuition and expenses to generate the $2,500 tax credit under AOTC, and your AQHEE will be the total amount of QHEE less $4,000. This is especially important to keep in mind if your child is completing his last semester during the summer and you will not be paying any additional expenses for the year. You will need to make sure you have deducted the amount of QHEE used to generate the tax credit.

$2,000 tuition expense + 25% ($2,000 tuition expense) = $2,500 tax credit
$2,000 tuition expense + $2,000 tuition expense = $4,000 used to generate tax credit

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originally posted: 2014-07-01, updated: 2015-06-04