Can I Use a 529 Plan for Summer Rent?

A 529 plan serves as a tax-advantaged savings vehicle designed to assist individuals in accumulating funds for future education costs. A frequent inquiry arises regarding the use of 529 funds for living expenses, particularly rent during summer terms. This article clarifies the conditions for housing expenses, including summer rent, for 529 plan withdrawals.

Understanding Qualified Education Expenses

For a 529 plan distribution to be tax-free, the funds must be used for “qualified education expenses” (QEE). The Internal Revenue Service (IRS) defines these as expenses required for enrollment or attendance at an eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary institution eligible to participate in a U.S. Department of Education student aid program.

Common examples of qualified education expenses include tuition and mandatory fees. Books, supplies, and equipment specifically required for enrollment or attendance also qualify. Also included are computer technology, related equipment, or internet access if used primarily by the beneficiary during their enrollment.

Housing Expenses and 529 Plan Eligibility

Housing expenses, such as rent, on-campus room and board, and utilities, can be considered qualified education expenses under specific conditions. For these costs to qualify, the student must be enrolled at least half-time in a degree or certificate program at an eligible educational institution.

When considering summer rent, the half-time enrollment rule directly applies. If a student is enrolled at least half-time during a summer term, then the associated summer rent can qualify. If the student is not enrolled at least half-time during the summer, then summer rent would not be considered a qualified expense.

A significant limitation for qualified housing expenses is that they cannot exceed the allowance for room and board included in the institution’s “cost of attendance” (COA). The COA is a figure determined by the school for financial aid purposes and typically includes tuition, fees, books, supplies, transportation, and living expenses like room and board. Both on-campus and off-campus housing, including rent and groceries, are treated similarly under these rules. To determine the specific COA allowance for room and board, it is advisable to contact the educational institution’s financial aid office.

Navigating 529 Plan Withdrawals

When taking withdrawals from a 529 plan, careful record-keeping is important to demonstrate that the funds were used for qualified education expenses. Retain documentation such as receipts, lease agreements for housing, and utility bills. This documentation supports the tax-free nature of the withdrawals if the IRS requests verification.

If 529 plan funds are withdrawn for expenses that are not considered qualified, the earnings portion of that withdrawal becomes subject to federal income tax. A 10% federal tax penalty applies to these earnings. The principal portion of the withdrawal is not subject to tax or penalty, as these contributions were made with after-tax dollars. For specific guidance on individual tax situations, consulting a tax professional is recommended.