529 plans can be helpful for funding a variety of educational expenses, but the rules around them can be tricky. While the federal government authorizes 529 plans, each state sponsors them – so a few of the guidelines can vary based on the state you live in. Here is a comprehensive guide to which educational expenses you can (and can’t) pay for without incurring federal and state tax penalties.
When it comes to traditional, community and technical colleges, the guidelines around qualified 529 expenses are reasonably simple. As long as a student is enrolled at an eligible postsecondary school, the following expenses can be paid for, tax-free, with 529 funds:
The rules around qualified expenses in a 529 plan aren’t always so cut and dry. While the following expenses can be paid for tax-free on the federal level (if certain requirements are met) from 529 accounts, some states will impose state tax on withdrawals for them:
Through a 529 plan, families can use up to $10,000 of the funds per calendar year (per beneficiary) to use towards a private elementary or secondary school’s tuition. It’s important to note here, however, that 529 funds can be used on private school tuition only – not other educational expenses, like textbooks and computers.
For students looking to jump right into the workforce with an apprenticeship, the IRS doesn’t leave you hanging. As long as the program is registered and certified with the Department of Labor, any fees, books, supplies and equipment required for participation can be paid for with 529 funds. You can determine whether a program qualifies on the U.S. Department of Labor’s website.
In between graduating from high school and starting college, some students take a year off (known as a gap year).
As students in this situation take time to consider their career and educational goals, some also enroll in a gap year program – a structured educational opportunity to gain life experience and career skills. In order to use money from your 529 plan to fund a gap year program, you need to ensure that the program offers college credits and is an eligible institution, which you can typically determine by whether they are on the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs.
If a student lives in off-campus housing, they can typically use 529 account funds to pay rent – but only up to the amount the school lists as the official cost of attendance for housing. For example, if the school’s COA for housing is $15,000 per academic year and the student’s apartment rent totals $17,000, only $15,000 can be paid with 529 funds. To find the school’s COA, check the school’s COA webpage or contact the financial aid office – and remember to document how much the housing allowance is. Also, be sure to keep track of the lease agreement and rent bills for the residence.
If the student chooses to remain living in their on or off-campus housing during summer break and is still enrolled at least half-time, the expense will still qualify under these guidelines.
Food and other groceries purchased outside of the university could qualify as an eligible expense if the following requirements are met:
While it may be cumbersome to track, a student choosing to use 529 funds on food while staying off-campus (and not using a meal plan) should be sure to maintain receipts.
For students who get through college but still have those pesky loans to pay off, 529 funds can be used to pay down both federal and private student loan debt with a lifetime limit of $10,000, federal tax-free. And if the beneficiary of the 529 account has siblings, each one can also use up to $10,000 from the account towards their student loan debt – without having to change the beneficiary.
There are many expenses that a student may incur throughout their college career that are not considered qualified expenses by the IRS – and therefore any withdrawals made from a 529 account to pay for them would be subject to tax and penalty on the earnings portion. These expenses include:
Despite the guidelines above, 529 plans can often have even more complexities. If you’re looking for information about eligible withdrawals or even tips on how to use leftover funds from your account, reach out to your Baird Financial Advisor today.
Investors should consider the investment objectives, risks, charges and expenses associated with a 529 Plan before investing. This and other information is available in a Plan’s official statement. The official statement should be read carefully before investing.
Depending on your state of residence, there may be an in-state plan that provides tax and other benefits such as financial aid, scholarships and creditor protection that are not available through an out-of-state plan. Before investing in any state’s 529 plan, you should consult your tax advisor.
The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.
