Top five ways to spend 529 savings

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You’ve been contributing to your child’s 529 account since they were in diapers, and now the time has finally come to take distributions. You likely chose to save with a 529 plan to take advantage of state and federal tax benefits, and now that your child has finished high school you realize what a major impact these benefits have had on your savings.

But before you start making withdrawals, make sure that the money will be spent on qualified higher education expenses (QHEE). Why, you ask? Well, for starters you will lose those coveted tax benefits on any non-qualified purchases. That means you will have to report any earnings in the account as taxable income, and rates will vary depending on the amount earned. As if that’s not enough to persuade you, the IRS will also hit you with a 10% penalty tax on the earnings portion of your account.

Avoid these 529 withdrawal traps

So now you’re probably wondering which expenses are considered qualified. Click through our slideshow to find out!

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1. Tuition

The easiest way to spend your 529 savings is by paying college tuition. According to the College Board college costs for a public college education during 2013-2014 averaged $22,826. That’s certainly not pocket change, and if you’re saving for a new baby’s college fund you could be looking at a total of $237,000 in 18 years (assuming a 5% tuition inflation rate).

How much do you need to save for college?

Fortunately for your wallet, more than half of students receive grants or scholarships with an average amount over $12,000. That being said, we don’t recommend counting on your child getting a full free ride. It’s always a safe bet to have 529 savings in your back pocket because even if a student earns enough awards to cover tuition costs, there are a number of other expenses they will incur.

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2. Room and Board

This one may come as a surprise to you, but college housing is sometimes considered a qualified higher education expense (QHEE), provided the student is enrolled at least half-time (usually 6-8 credit hours per semester). For those who live in the dorms on campus, you can use 529 distributions to pay the amount that the school charges for room and board.

What many parents don’t realize is that off-campus rent can also qualify. If your child is commuting from home or residing elsewhere off-campus, ask the financial aid office for the school’s room and board allowance. The amount the school includes in their “cost of attendance” figures for financial aid purposes can often be counted as QHEE.

Record-keeping for your 529

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3. Books and Supplies

As a percentage of total college costs, the price of books probably doesn’t seem so bad. You may even remember being able to pay for your own college textbooks with money from a part-time job. But, just like tuition, textbook prices have also fallen victim to monumental inflation. In fact, according to an article in the Christian Science Monitor textbook prices are rising faster than tuition prices and the consumer price index.

So just how much are we talking about? Research from the College Board uncovered that students currently spend an average of $1,200 on required books and supplies per year. If that seems expensive to you, it’s probably because it is 864% higher than what students paid in 1978. But unlike 1978, today’s students can offset these costs with tax-free earnings and state tax credits and deductions from a 529 plan.

VIDEO: Which 529 plans are qualified?

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4. Computers and related equipment

In today’s technology-driven world, many students can’t imagine living without their laptop, smartphone or tablet. These items are used for schoolwork on a regular basis, including emailing a professor, taking photos, writing papers, spreadsheet projects, presentations, and the list goes on. Fortunately, the signing of the PATH Act in December 2015 made computers and related technology equipment a permanent qualified expense so that families are now able to use their tax-free 529 savings to cover the costs.

New tax bill brings improvements to education benefits

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5. Special Needs Equipment

Parents often question whether or not it is wise to open a 529 college savings plan for a disabled child because there’s a risk they will not attend college. But today’s students with disabilities have more opportunities than ever when it comes to getting a college education. Whether your child is vision or hearing impaired, suffering from autism, dyslexia or other learning disability, there are a growing number of schools offering special programs to assist with the transition into the workforce.

529 savings will not only help families pay for tuition, but special needs equipment that is necessary for the student’s enrollment will be also be considered a qualified educational expense. For example, your 529 distributions can be spent on costs associated with making a dorm room handicapped-accessible.

Comparison chart of savings vehicles

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