Can a 529 Plan Only Be Used for College?

A 529 plan is a tax-advantaged savings vehicle established by a state or educational institution to encourage saving for future education costs. While these plans are widely associated with college expenses, their utility extends beyond traditional higher education.

Understanding Qualified Higher Education Expenses

Qualified higher education expenses (QHEE) are central to a 529 plan’s tax benefits, as withdrawals for these costs are federal income tax-free. These expenses include tuition and fees required for enrollment or attendance at an eligible educational institution. An eligible institution encompasses accredited public, nonprofit, or proprietary postsecondary schools, including colleges, universities, and vocational schools, that are eligible to participate in federal student aid programs.

Room and board expenses also qualify if the student is enrolled at least half-time. For students living off-campus, the qualified amount for room and board cannot exceed the cost of attendance determined by the educational institution. The cost of books, supplies, and equipment required for enrollment or attendance are considered QHEE. This includes computers, peripheral equipment, software, and internet access if used primarily for educational purposes. Special needs services required by a special needs beneficiary also fall under qualified expenses.

Beyond Traditional College Costs

The scope of a 529 plan’s qualified expenses has expanded beyond traditional college tuition and fees, offering flexibility for diverse educational pathways. These expanded uses include K-12 tuition, apprenticeship programs, and student loan repayment.

Funds can be used for K-12 tuition expenses at elementary or secondary public, private, or religious schools, up to $10,000 per beneficiary per year. This limit applies specifically to tuition, not other related expenses like books or uniforms. While federal law permits this, state tax treatment may vary, so confirming state-specific rules is advisable.

529 plans can also cover expenses for registered apprenticeship programs. Qualified costs for these programs include fees, books, supplies, and equipment, such as required trade tools, provided the program is registered and certified with the Secretary of Labor under the National Apprenticeship Act.

The repayment of qualified student loans is another expanded use, allowing up to a lifetime limit of $10,000 per individual. This $10,000 limit applies to both the principal and interest on student loans for the beneficiary of the 529 plan, and an additional $10,000 can be used for each of the beneficiary’s siblings. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 introduced this provision.

Recent legislation, the SECURE 2.0 Act, allows for limited rollovers of unused 529 funds to a Roth IRA. As of January 1, 2024, up to a lifetime maximum of $35,000 can be rolled over to a Roth IRA for the same beneficiary without federal tax or penalty. To qualify, the 529 account must have been open for at least 15 years, and contributions made within the last five years are ineligible for rollover. The annual rollover amount is also capped at the Roth IRA annual contribution limit for that year, and the beneficiary must have earned income at least equal to the rollover amount.

Consequences of Non-Qualified Withdrawals

If 529 plan funds are withdrawn for non-qualified purposes, there are financial consequences. The earnings portion of a non-qualified withdrawal becomes subject to federal income tax at the account owner’s ordinary income tax rate.

In addition to income tax, a 10% federal penalty tax typically applies to the earnings portion of non-qualified withdrawals. The original contributions, or principal, are not subject to this tax or penalty because they were made with after-tax dollars.

There are exceptions where the 10% federal penalty tax is waived, even if the withdrawal is not for QHEE, though the earnings portion may still be subject to income tax. These exceptions include instances where the beneficiary receives a tax-free scholarship (penalty waived up to the scholarship amount), attends a U.S. military academy (to the extent of the value of attendance), dies, or becomes disabled.

Changing Beneficiaries and Other Transfers

529 plans offer flexibility beyond direct spending on educational expenses through provisions for changing beneficiaries and transferring funds. An account owner can change the designated beneficiary of a 529 plan without incurring tax consequences, provided the new beneficiary is an eligible family member of the current beneficiary. The Internal Revenue Service defines an “eligible family member” to include siblings, step-siblings, children, stepchildren, parents, stepparents, aunts, uncles, first cousins, and in-laws.

This flexibility allows families to reallocate funds if the original beneficiary receives a scholarship, decides not to pursue higher education, or has leftover funds after completing their education. Changing a beneficiary involves completing a form provided by the 529 plan administrator. The account owner maintains control over the funds until they are withdrawn or transferred.

Funds can also be rolled over from one 529 plan to another without tax implications, either for the same beneficiary or for a new eligible family member. This type of rollover is permitted once every 12 months for the same beneficiary. Account ownership can also be transferred, often due to events like death or as a gift, without triggering tax events.