529 Plans: Qualified and Nonqualified Expenses

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 types of 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) Registered apprenticeship program	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. Required equipment, including tools for apprenticeship programs.	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 the 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.
Repay student loan debt	Principal and interest payments toward qualified education loans of the 529 plan beneficiary or siblings of the plan beneficiary.	Lifetime limit of $10,000 for the plan beneficiary and additional $10,000 per sibling of the plan beneficiary. Interest that is paid with 529 funds will not be eligible for student loan interest deduction.

Nonqualified 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	Student loan payments in excess of current qualified expense limits.
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 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.

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.

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529 Plans: Qualified and Nonqualified Expenses

Qualified Expenses

Nonqualified expenses

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