- 529 funds must be used for payment of qualified expenses to maintain tax-advantaged status.
- Basic qualified expenses include tuition, room and board, books, and mandatory fees, but other expenses may also qualify.
- Keep receipts for payments made with 529 plan funds.
After years of careful saving, you want to be sure you get the most from your 529 plan funds. To protect your tax-advantaged status, you must use withdrawals on qualified education expenses, which are defined by the IRS. While the rules are designed to be flexible, there are important details to consider.
529 Qualified Expenses
Most basic education costs fall under the definition of qualified expenses, including tuition, mandatory fees, housing, and meal plans. In addition, required books and supplies also qualify. This is especially helpful for students who choose fine arts, science and technology majors, as these often come with a long list of required equipment for class participation.
There are some lesser-known uses for 529 funds, beginning with certain computers and related equipment. Having this category of expenses included in the list of qualified expenses is a big relief since classes at many schools today require students to go online to collaborate with classmates or submit assignments.
On-campus housing is a popular use of 529 withdrawals, but many families don’t realize that some off-campus housing – including commuting from home – can also be considered a qualified expense. The school’s financial aid office reports an average cost of room and board to the federal financial aid program. It is often possible to apply this figure towards students’ qualified expenses.
Finally, the equipment required to make it possible for special needs students to attend school is usually considered a qualified expense. For example, adaptive technology for vision and hearing impaired students may be eligible for payment with 529 withdrawals.
Examples of non-qualified expenses include optional fees, travel expenses, costs related to team sports, and computer software not required for education.
Documenting Your 529 Withdrawal
When you withdraw funds from your 529 account, keep the tax advantages of your distributions by only taking out the amount you need to pay the student’s qualified expenses for the year. Funds set aside for future school years should stay in the 529 plan until they are needed. Make purchases and payments for items that are on the list of qualified expenses separate from purchases that are not qualified expenses. Keep all of your receipts with the rest of your tax-related paperwork. This documentation could be necessary to show that your 529 funds were used in compliance with 529 requirements.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.
Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.