Can I Use 529 for International Schools?

A 529 plan offers a tax-advantaged way to save for future educational expenses. While primarily used for U.S. higher education, with tax-free growth and withdrawals, many families now explore international education. This raises questions about applying 529 funds to schools abroad. Understanding the regulations is important for effective use.

Determining School Eligibility

Using 529 plan funds for an international institution depends on the school’s eligibility. An “eligible educational institution” for 529 plan purposes is any postsecondary institution eligible to participate in a U.S. Department of Education student aid program. This includes foreign institutions meeting federal requirements, such as those eligible for federal student aid programs under Title IV of the Higher Education Act of 1965. Many foreign universities, including those in the United Kingdom, Canada, Australia, Germany, and France, qualify.

Verifying an international school’s eligibility is important before using 529 funds. Account holders can confirm eligibility by checking the U.S. Department of Education’s database of eligible foreign schools, known as the Federal School Code List, on StudentAid.gov. Contacting the international school’s financial aid or admissions office directly to inquire about their Title IV eligibility status is also advisable. Confirming this status ensures withdrawals from a 529 plan are qualified distributions, avoiding potential tax implications.

Identifying Qualified Expenses

Once an international school’s eligibility is established, certain expenses are considered “qualified higher education expenses.” These expenses mirror those allowed for domestic schools, ensuring tax-free withdrawals. Qualified expenses include tuition and mandatory fees, such as laboratory or technology fees. The cost of books, supplies, and equipment necessary for coursework also qualifies.

Room and board expenses can also qualify, but they are subject to limitations. For students living on campus, these costs are qualified up to the actual amount charged by the school for housing and meals. If the student lives off-campus, the qualified amount for room and board is limited to the allowance determined by the eligible institution for federal financial aid purposes, or the actual amount paid, whichever is less. Special needs services expenses for a beneficiary with special needs are also considered qualified. Only expenses incurred while the student is enrolled at least half-time in a degree or certificate program qualify for tax-free withdrawals.

Making Plan Withdrawals

The process for withdrawing funds from a 529 plan for an eligible international school is similar to that for domestic institutions. Account owners request a distribution directly from their 529 plan administrator, typically via an online portal, phone, or specific form. The administrator issues Form 1099-Q, “Payments From Qualified Education Programs,” reporting the total amount distributed. This form separates original contributions (basis) from investment earnings.

Record-keeping is important when making withdrawals, especially for international transactions. Account owners should retain all receipts, invoices, and payment confirmations for qualified expenses to substantiate appropriate use. When paying international schools, currency conversion rates can fluctuate, impacting the exact U.S. dollar amount needed. Factor in potential exchange rate variations to ensure sufficient funds are withdrawn to cover expenses. While the 529 plan administrator reports distributions on Form 1099-Q, it is the account owner’s responsibility to calculate the taxable portion, if any, and report it correctly to the Internal Revenue Service (IRS).

Addressing Ineligible Schools

Using 529 plan funds for an international school that does not meet eligibility criteria, or for non-qualified expenses, results in a “non-qualified distribution.” The earnings portion of the withdrawal becomes subject to federal income tax at the account owner’s ordinary income tax rate. A 10% federal penalty tax applies to these earnings. This penalty aims to discourage the use of tax-advantaged 529 funds for non-educational purposes.

The 10% federal penalty may be waived in certain exceptions, though earnings remain subject to income tax. Exceptions include withdrawals due to the beneficiary’s death or disability. The penalty is also waived if the beneficiary receives a tax-free scholarship or attends a U.S. military academy. Even with these exceptions, any earnings withdrawn for non-qualified purposes are still taxed as ordinary income.