When it comes to funding education, 529 savings plans are a fantastic tool—tax-advantaged and built specifically to help you (and your family) save for the future. But one of the most important parts of using a 529 plan is knowing which expenses count as qualified distributions. Why? Because if you use the funds for non-qualified expenses, you could face taxes and a 10% penalty on your earnings. Let’s break it down.
What Are Qualified Expenses?
529 plans are designed to cover educational expenses—but not just any expenses. Here’s what qualifies:
1. Tuition and Fees
Whether it’s for college, university, vocational school, or even K-12 education (up to $10,000 per year), tuition and mandatory fees are covered.
2. Room and Board
If your student is enrolled at least half-time, you can use 529 funds for room and board. This includes on-campus housing and, in many cases, off-campus housing, as long as the costs don’t exceed the school’s published cost of attendance.
3. Books and Supplies
Textbooks, lab equipment, and other required supplies for classes count as qualified expenses.
4. Computers and Technology
Laptops, printers, software, and internet access used primarily for school are eligible.
5. Special Needs Equipment
If your student has special needs, equipment and services necessary for their education are covered.
Expenses That Don’t Qualify
It’s equally important to know what’s not covered to avoid penalties. Non-qualified expenses include:
- Travel costs to and from school
- Health insurance premiums or medical expenses
- Extracurricular activities or club fees
- Cell phones (unless required by the school)
- Room and board costs exceeding the school’s allowance for off-campus housing
The K-12 Education Exception
Thanks to recent changes in tax law, you can use up to $10,000 per year from a 529 plan for K-12 tuition at private, public, or religious schools. However, keep in mind this only applies to tuition, not other costs like uniforms or school supplies.
Student Loan Repayment
Another newer benefit: 529 plans can now be used to repay up to $10,000 in student loans per beneficiary. This also extends to $10,000 per sibling of the beneficiary.
A Few Things to Watch For
- 529 to Roth IRA Rollovers: Recent tax law changes allow for rolling unused 529 funds into a Roth IRA under certain conditions. This can be a great way to repurpose leftover funds for retirement savings while avoiding penalties.
- Timing Matters: Withdrawals should match expenses in the same calendar year. If you withdraw funds in December but pay the bill in January, it could cause tax complications.
- Documentation is Key: Keep receipts, bills, and statements for all qualified expenses. This ensures you’re prepared in case of an audit.
Let’s Make it Work for You
Understanding what qualifies as a 529 plan expense can save you time, stress, and money. If you’re planning to use a 529 plan or want to explore how it fits into your financial goals, we’re here to help. Let’s make the most of your education savings and keep you on track toward achieving your big-picture dreams.
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Nadine Thibault | Director, Advice Team, Private Wealth Advisor | CFP®, BFA™ | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.