Have you saved money in a 529 plan to pay for your kids’ college? Wondering which education expenses you can pay from the 529 account as qualified expenses and which expenses are non-qualified?
With students heading back to school, now is a great time to begin planning for your 529 plan distributions for the coming academic year. Please keep in mind that 529 plan distributions used for qualified education expenses are 100% tax-free while distributions used for non-qualified education expenses result in the earnings portion of those distributions being subject to income taxes plus a 10% penalty.
The following expenses qualify as an educational expense for 529 plan distributions:
- Tuition and fees at post-secondary educational facilities such as colleges and universities, both graduate and undergraduate. Vocational and trade school institutions plus two-year colleges qualify as well.
- Student loan payments – subject to a lifetime cap of $10,000.
- College room and board fees if the student is enrolled at least half-time. Off campus housing and meals also qualify, capped at the cost of the on-campus room and board fees (based upon the college’s published cost of attendance (COA)).
- College books and school supplies. Often, this limit is set by the college.
- Computer and tech expenses that are required for enrollment by the college and required by specific classes. This qualified expense also includes internet expenses incurred by students.
- Special needs equipment needed by a student to attend a post-secondary institution. Travel expenses, generally not allowed as a 529 plan qualifying expense, often qualify for special needs students.
- Tutoring costs.
- For grades K – 12, up to $10k per year can also be used for tuition at private schools.
And these expenses do NOT qualify as an educational expense for 529 plan distributions:
- Premiums paid for student health insurance while attending post-secondary schools, even for a policy offered by the school.
- Travel costs to and from the qualified school, such as airfare, gas and hotels.
- Extracurricular activities while attending school.
- For grades K – 12, home schooling costs unless determined by your state that home schooling qualifies as a form of private school.
If you child has opted to study abroad, 529 plan distributions may still qualify to be used for foreign educational expenses. Several hundred foreign educational institutions accredited by the US DOE qualify count. Parents and students can check the link provided by the www.savingforcollege.com to learn which foreign schools allow for tax-free 529 distributions.