You’ve put in the hard work of saving for college, and now it’s time to start using those 529 plan assets to help with a family member’s education-related costs. But before you begin withdrawing those funds, it’s important to understand the difference between qualified and nonqualified expenses.
The charts below provide an overview of some of the most common qualified and non-qualified expenses.
Qualified Expenses
|
Expense |
Requirements |
Important Considerations |
|
Tuition and fees |
College must be accredited and eligible for U.S. Department of Education’s student aid program K–12 eligible (eligibility varies by state) |
Limited to $10,000 per year for K–12 Some foreign institutions qualify |
|
Books, supplies, and equipment |
College courses only Must be required for the course
|
Items may be purchased from anywhere (e.g., Amazon) Keep evidence of requirement (e.g., course syllabus) |
|
Special needs services |
College courses only Must show connection to enrollment or attendance |
|
|
Room and board |
College courses only Maximum amount is greater of either 1) actual charge for residence in school-operated housing or 2) annual “financial aid cost of attendance” room and board amount for that school |
Must be enrolled at least half-time (credit hours defined by school) For off-campus housing, contact school’s financial aid office for applicable cost of attendance amounts |
|
Computers, computer hardware, software, and internet access |
College courses only Must be used primarily by the 529 beneficiary and during years of enrollment |
Software should be predominantly educational in nature
|
Non-Qualified Expenses
|
Expense |
Important Considerations |
|
Transportation and travel costs
|
Often a concern for out-of-state students Even if for travel to and from campus during holiday times, no travel costs qualify |
|
Health insurance |
Not qualified, even for a health plan provided by the student’s school |
|
Extracurricular activity fees |
Only tuition costs and fees are qualified; additional activity fees are not |
|
Student loans |
Only current tuition and fees count as qualified Cannot use 529 funds to pay down existing student loans |
|
Application and testing fees |
Preparatory fees are not qualified 529 distributions limited to tuition and fees associated with current enrollment |
Please note: Just because an expense is nonqualified, it doesn’t mean the 529 plan funds cannot be considered a source of payment. The main consequence of paying nonqualified expenses from the 529 plan is that the gains portion of that distribution will be taxed, and it could be assessed a 10 percent penalty.
For more information on 529 plans (referred to as “Qualified Tuition Programs”), and for examples of tax and coordination calculations, see the Qualified Tuition Programs section of the IRS Publication 970.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
As a guest blogger, I'm unable to respond directly to comments posted below, but if you have any questions about qualified and non-qualified expenses, please feel free to contact me directly - I'm happy to help!
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee a college-funding goal will be met. Earnings must be used to pay for qualified higher education expenses to be federally tax-free. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Kristen Smith is a guest blogger, representing Axial Financial Group in Burlington, MA. She offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. CRR, LLP (also represented as CRR, CRR CPA), Axial Financial Group, and Commonwealth Financial Network are separate and unrelated entities. Kristen can be reached at 781-273-1400 or ksmith@axialfg.com. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.
