One of the key benefits of a 529 college savings plan is that all distributions used to pay for qualified education expenses are federal tax free.1 Have questions about what is and isn’t a qualified education expense? You’re not alone. Here’s a basic primer on common expenses.
- Tuition: Considered a qualified education expense for both full- and part-time students at accredited institutions. Study abroad programs can also be qualified expenses, particularly if the student is receiving credit for attending. If you’re planning to use your 529 to pay tuition for grades K through 12, the limit is $10,000 per calendar year. Note that tuition is the only qualified expense for grades K through 12.
- Room and board: Dorm room and sorority/fraternity living quarters are qualified expenses if the student is enrolled in an eligible college at least half of the time. If your child lives off campus, qualified room and board costs are limited to what’s included in the college’s cost of attendance (COA) allowance for the period. Costs in excess of the COA aren’t considered qualified expenses.
- Books and supplies: Included expenses comprise all textbooks and other required reading materials, plus supplies such as pens, paper, and calculators.
- Computers and peripheral equipment: This includes tablets, laptops, printers, internet access, and necessary software, such as Microsoft Word and AutoCAD.
- Special needs resources: If your child has a disability and needs assistance or special equipment, these costs are considered qualified expenses.
You can still use the proceeds of your 529 college savings plan account to pay for other expenses, but any earnings from these withdrawals are subject to federal income taxes and applicable state taxes, plus a 10% penalty. You may also have to pay back income-tax deductions you claimed on your previous tax returns. Nonqualified expenses include:
- Cell phones and data plans: While these aren’t qualified expenses, be sure to check with the respective college, as many schools offer student discounts on plans and phones.
- Transportation expenses: Whether it’s the cost of your child getting to campus daily or traveling home for Thanksgiving, these expenses are already factored into the overall COA by most schools.
- Health insurance and medical bills: As these aren’t considered education expenses, they aren’t qualified.
- School memberships: This includes annual dues for joining sororities or fraternities, sports teams, and gyms.
- Student loans: If used to pay back borrowed funds, you’ll have to pay taxes and a 10% penalty on the withdrawals.
Regardless of whether your expenses are qualified or nonqualified, be sure to keep receipts, as you’ll need them when doing your taxes. Speak to your financial professional or tax advisor for more information on taking distributions from your 529 account.