Can a 529 Plan Be Used for a Master’s Degree?

A 529 plan is a savings account designed for future education costs. These plans are sponsored by states and offer tax advantages. Contributions to the account can grow free from federal income tax, and when the money is taken out for qualified education expenses, those withdrawals are also tax-free at the federal level. Many states also provide a state tax deduction or credit for contributions made to their specific 529 plan.

Graduate School Program Eligibility

Funds held within a 529 plan can be used to pay for graduate-level programs, including master’s degrees. This flexibility extends beyond undergraduate studies to encompass professional schools, such as law or medical school, and doctoral programs. The primary requirement for using 529 funds is that the beneficiary must attend an “eligible educational institution.” This is any college, university, or other postsecondary institution that is eligible to participate in federal student aid programs.

Most accredited graduate schools in the United States meet this standard, and you can verify an institution’s eligibility by checking for its Federal School Code on its financial aid website. Another consideration is the student’s enrollment status. While tuition and fees are always qualified expenses, other costs have requirements. The definition of “half-time” is determined by the institution, so it is important to confirm this status with the school’s registrar or financial aid office.

Qualified Higher Education Expenses

The tax-free benefit of a 529 plan is contingent upon using the funds for specific, approved costs known as Qualified Higher Education Expenses (QHEEs). The rules apply equally to both undergraduate and graduate studies.

Tuition and Fees

The most common use of 529 plan funds is for tuition and fees required for enrollment or attendance at an eligible institution. Any fee that is a condition of enrollment, such as student activity fees, technology fees, or lab fees, is considered qualified. The amount that can be withdrawn tax-free is the amount billed by the university for these specific charges.

Books, Supplies, and Equipment

Funds can also be withdrawn to cover the cost of books, supplies, and equipment needed for courses. This includes required textbooks and other necessary materials for study. For example, a computer, peripheral equipment, software, and internet access can be considered qualified expenses, provided they are used primarily by the beneficiary during their years of study. Software designed for sports, games, or hobbies does not qualify unless it is predominantly used for educational purposes.

Room and Board

The amount that can be treated as a qualified expense for room and board depends on the student’s living situation and enrollment status. The student must be enrolled at least half-time for any housing costs to qualify. If the student lives in university-owned housing, the qualified expense is the actual amount the school charges for room and board.

If the student lives off-campus or at home, the amount that can be withdrawn tax-free is limited to the allowance for room and board included in the school’s official “cost of attendance” (COA). This COA figure is determined by the institution and can be found on its financial aid website. The withdrawal is capped at the school’s calculated allowance for a student living off-campus.

Student Loan Repayment

In addition to direct education costs, 529 plan funds can be used to pay down student debt. A lifetime maximum of $10,000 per beneficiary can be withdrawn tax-free to pay the principal and interest on qualified student loans. This benefit can be applied to the loans of the beneficiary or their siblings.

The Withdrawal Process

There are two methods for withdrawing money from the account. You can request that the funds be paid directly to the eligible educational institution, or you can have the funds paid to the account beneficiary or the account owner. If you choose to have the funds sent directly to the school, the 529 plan administrator will handle the transaction. If you opt to have the funds sent to yourself, you are then responsible for paying the school and maintaining records.

Regardless of the payment method, record-keeping is important. You must save all relevant documentation, such as tuition statements, invoices for fees, and receipts for books and required equipment. These records serve as proof that the distribution was used for Qualified Higher Education Expenses in an IRS audit.

The withdrawal from the 529 plan must occur in the same calendar year that the qualified expense was paid. For example, if you pay for tuition in December 2024, you must take the corresponding withdrawal from your 529 plan before the end of 2024. Taking the withdrawal in 2025 could lead to tax consequences.

Handling Non-Qualified Distributions

Withdrawing money from a 529 plan for any purpose other than a Qualified Higher Education Expense is a non-qualified distribution. The portion of the withdrawal that represents your original contributions comes back to you tax-free and penalty-free. However, the earnings portion of the distribution is subject to federal income tax at the recipient’s ordinary income tax rate.

In addition to income tax, the earnings portion is subject to a 10% federal tax penalty. For instance, if a $5,000 withdrawal consists of $3,000 of contributions and $2,000 of earnings, only the $2,000 in earnings is taxable and subject to a $200 penalty. If you previously claimed a state income tax deduction, you may also have to pay back that benefit in a process called “recapture.”

Federal law provides an option for unused funds that avoids these consequences. Under certain conditions, money from a 529 plan can be rolled over to a Roth IRA for the same beneficiary, subject to a lifetime maximum of $35,000. For the rollover to be permitted, the 529 account must have been open for at least 15 years. The amount you can roll over each year is also limited by the annual Roth IRA contribution limit.