529 plan FAQs

Updated: 2018-03-07

What can a 529 plan be used for?

A 529 plan is an investment account that offers tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified education expenses. For college, university and other eligible post-secondary educational institutions, this includes tuition and fees, books and supplies, computers and sometimes room and board. The IRS also allows tax-free withdrawals of up to $10,000 per year, per beneficiary to pay for tuition expenses at private, public and religious K-12 schools.

What is not covered by a 529 plan?

The funds in a 529 plan are yours, and you can always withdraw them for any purpose. However, the earnings portion of a non-qualified distribution will be subject to penalty and taxes, though there are exceptions.

At the college or post-secondary level, a general rule of thumb is that expenses required for enrollment in an eligible institution are covered. However, there are some costs that you may believe are necessary, but the IRS does not consider a qualified expense. For example, a student's health insurance, transportation costs and student loan repayments are not qualified expenses.

Are 529 plan contributions tax-deductible?

Much like a Roth IRA, contributions to a 529 plan are post-tax, and are not deductible from federal taxes. However, over 30 states and the District of Columbia offer tax deductions or credits for contributions to 529 plans, though you may be restricted to investing in your home state's plan in order to claim the benefit.

Funds in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn for qualified education expenses.

What are qualified education expenses for a 529 plan?

Qualified expenses include tuition and fees, books and materials, some room and board, computers and related equipment, internet access and special needs equipment for students attending a college, university or other eligible post-secondary educational institutions. Transportation costs, health insurance and student loan repayments are not considered qualified expenses. The Tax Cuts and Jobs Act of 2017 also allows tax-free distributions of up to $10,000 per year, per beneficiary to pay for K-12 tuition expenses at private, public and religious schools.

The earnings portion of a non-qualified withdrawal may be subject to federal and state income tax, as well as a 10 percent penalty. Since your contributions were made with after-tax money, they will never be taxed or penalized.

Can I use a 529 plan to pay for rent?

Yes, room and board is considered a qualified expense if the student is enrolled at least half-time, which at most colleges and universities equates to at least six credit hours per term.

For on-campus residents, qualified room-and-board expenses cannot exceed the amount charged by the college for room and board. For students living off-campus, qualified room and board expenses are limited to "cost of attendance" figures provided by the school. Contact your financial aid office for more information.

How do I use my 529 plan?

Once you're ready to start taking withdrawals from a 529 plan, most plans allow you to distribute the payments directly to the account holder, the beneficiary or the school. Some plans may allow you to make a payment directly from your 529 account to another third party, such as a landlord. Read How to pay your tuition bill with a 529 plan to learn more. Remember, you will need to check with your own plan to learn more about how to take distributions.

Depending on your circumstances, you may need to report contributions to or withdrawals from your 529 plan on your annual tax returns.

What happens if my child doesn't use the 529 plan?

The future is always uncertain, and some parents worry about losing the money they saved in a 529 plan if their child doesn't go to college or gets a scholarship. Generally, you will pay income tax and a penalty on the earnings portion of a non-qualified withdrawal, but there are some exceptions. The penalty is waived if:

  • The beneficiary receives a tax-free scholarship
  • The beneficiary attends a U.S. Military Academy
  • The beneficiary dies or becomes disabled

However, your earnings will be subject to federal, and sometimes state, income tax.

What happens to money not used in a 529 plan?

If you want to avoid paying taxes and a penalty on your earnings, you have a few options, including:

  • Change the beneficiary to another qualifying family member
  • Hold the funds in the account in case the beneficiary wants to attend grad school later
  • Make yourself the beneficiary and further your own education
  • Roll over the funds to a 529 ABLE account, a savings account specifically for people living with disabilities
  • As of January 1, 2018, parents also have the option to take up to $10,000 in tax-free 529 withdrawals for K-12 tuition

Remember, you can withdraw leftover money in a 529 plan for any reason. However,

the earnings portion of a non-qualified withdrawal will be subject to taxes and a penalty, unless you qualify for one of the exceptions listed above. If you are contemplating a non-qualified distribution, be aware of the rules and possible tactics for reducing taxes owed.


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