Can you pay a mortgage with a 529 plan?



Dear Joe, Can I use a mortgage payment for student housing expense as a 529 plan expense? I would like to purchase a condo near campus for my out-of-state student and pay the mortgage with 529 savings. -- Ross


Dear Ross,

You run the risk of an IRS challenge if you count your mortgage payments as a 529 plan expense. The reason for this is that qualified higher education expenses must be incurred by the student, and in this case you are contemplating a mortgage on property you own yourself.

Instead, your child should pay a reasonable rent to you for living in your condo. The rent payments will pass muster as a 529 expense and can be withdrawn tax-free from your 529 plan. Unfortunately, you would have to report the rent income on your own tax return, but you could then also claim mortgage interest, property taxes, depreciation and certain other costs as rental expenses.

Remember, there is a limit to how much can be withdrawn tax-free from a 529 plan to pay for room and board. The limit is determined by each school based on its "cost of attendance" figures reported to the federal government for financial-aid purposes. You should ask the school's financial-aid office for the relevant room-and-board figure.

Instead of purchasing the condo in your name, consider the alternative of helping your child purchase his or her own condo. This way it may be possible to include the mortgage payments incurred by your child as 529-eligible expenses. This is a gray area, so check first with your own tax professional. Of course, you may have to co-sign on the mortgage if your child cannot qualify for a mortgage on his or her own.

Your child may even qualify for the first-time homebuyer tax credit, worth as much as $8,000. The credit has been extended into 2010, although there are a number of new rules attached to it. For example, the homebuyer must be an individual who cannot be claimed as a dependent on someone else's tax return.

To have any hope of qualifying for the homebuyer credit, there must be a binding purchase contract in place by April 30, 2010, and settlement must occur by June 30, 2010. Your child will have to maintain the property as his or her primary residence for at least three years or have to repay the credit.

Popular Questions


Two kids, two 529 plans?

Dear Big Bill,
While it's possible to maintain a 529 plan in just one child's name, even when you intend to send more than one child to college, I generally recommend that families open a separate 529 account for each child.

That's assuming there is no additional cost to maintaining multiple accounts. If your 529 plan charges an annual or quarterly account maintenance fee, check to see if you can avoid the fee by signing up for automatic contributions through payroll deduction or electronic funds transfer)

With a separate 529 plan for each child, it becomes easier for you to tailor the mix of stocks, bonds and stable-principal investments (e.g., stable value, guaranteed principal and money market funds) to the particular ages of your children. When your older child is nearing high school graduation, you may want to ratchet down the level of market risk in her 529 plan. At the same time, you could keep a more-aggressive asset allocation in your younger child's 529 plan, accepting more risk for a potentially higher return. Many 529 plans offer "age-based" investment options that automatically make these adjustments as the beneficiary ages.

Separate accounts for your children also offer more gift-tax leeway. Since your 529 contributions are treated as gifts from you to the account beneficiary, your $15,000 (in 2018) annual gift exclusion will go twice as far with two accounts -- one for each child -- than with just one account.

Financial aid is another reason to recommend maintaining separate accounts. You wouldn't want the investments reserved for your younger child's future college expenses to count against your older child's financial aid eligibility. Be warned: The rules here are rather murky, and the impact of a sibling's 529 account may depend on the college's own policies as well on as the type of aid -- federal or institutional -- being sought.

Finally, I believe that separate 529 accounts allow for better family bookkeeping. There will never be any doubt as to your intention to help send all of your children to college. You'll avoid the uncomfortable position of being asked to explain to a curious 8th-grader why account statements are showing up in the mail with only a brother or sister's name on them. And in the event of your death or divorce, no matter how unlikely, your legal representatives and other family members will have less reason to question your actions in setting up and funding the 529 plans.

Even with separate accounts, you'll continue to have the flexibility to shift the money around in the future. You simply need to make sure that whenever funds are withdrawn from the 529 plan to pay for college they are coming from an account in the name of the child incurring the costs. It's a simple matter to change the beneficiary designation among family members at any time, transfer 529 funds between different family members' accounts or split one 529 account into two. The ability to move assets around the family is a key advantage of 529 plans when comparing other college-savings alternatives, such as Uniform Transfers to Minors Act, or UTMA, accounts.

Original Post: 2005-10-13
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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition. This feature is appreciated most in families planning to send their children to private grade schools, which may include additional costs such as room and board or uniforms. A 529 plan, on the other hand, does not impose age limits or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And don’t forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

Original post date 2013-07-15
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Top 529 Plan Withdrawal Tips. (Script)

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Top 529 Plan Withdrawal Tips. (Video)

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