Can I Use a 529 Plan to Pay for Transportation?

A 529 plan is a tax-advantaged savings account designed to help families set aside funds for future education costs. These plans are sponsored by states or educational institutions and allow contributions to grow without being subject to federal taxes. When the money is withdrawn, it remains tax-free, provided it is used for specific, approved educational purposes.

Defining Qualified Higher Education Expenses

The Internal Revenue Service (IRS) defines the specific costs that can be paid for with 529 plan funds as Qualified Higher Education Expenses (QHEEs). These expenses are detailed in IRS Publication 970. The primary category of QHEEs is tuition and fees required for enrollment or attendance at an eligible educational institution, which includes most accredited postsecondary schools. This covers the basic cost of instruction and mandatory administrative charges.

Another category of QHEEs includes books, supplies, and equipment. For these items to qualify, they must be required for enrollment or attendance in a course of study. For example, the cost of a specific textbook or a lab coat for a science course would be a QHEE. The definition also extends to computer technology, related equipment, and internet access, as long as these are primarily used by the beneficiary while enrolled.

Room and board expenses also fall under QHEEs, but with specific limitations. The student must be enrolled at least half-time for their housing and food costs to be eligible. The amount that can be withdrawn for room and board cannot exceed the allowance included in the college’s official cost of attendance figures. This prevents using the funds for off-campus housing that is more expensive than what the school estimates for its students.

Transportation as a 529 Expense

The everyday costs of travel between a home and a campus are not considered qualified expenses. Funds used for daily commuting, such as purchasing gasoline for a personal vehicle, paying for a monthly public transit pass, or using ride-sharing services, would be treated as a non-qualified withdrawal. The cost of routine car maintenance, insurance, or parking passes for a campus lot are also excluded from the definition of a QHEE. The IRS maintains a strict interpretation, focusing on expenses that are direct requirements for enrollment or coursework.

A narrow exception exists where transportation costs may be permissible. If travel expenses are included as a component of a comprehensive fee charged by the institution, they can become a qualified expense. For instance, if a university offers a study-abroad program where the cost of airfare is bundled into the total program fee paid to the school, that portion of the fee could be covered by a 529 plan. The distinction is that the expense is not paid to a third-party vendor like an airline, but to the school as part of a required charge.

Consequences of Non-Qualified Withdrawals

Using 529 plan funds for expenses that do not meet the IRS definition of a QHEE results in tax consequences. When a non-qualified withdrawal is made, it is separated into two parts: the principal contributions and the investment earnings. The portion of the withdrawal that represents your original contributions is returned to you tax-free.

The earnings portion of the non-qualified withdrawal is subject to ordinary income tax at the recipient’s marginal tax rate. In addition to the income tax, the earnings are also subject to a 10% federal tax penalty. This penalty is designed to discourage using the account for anything other than its intended educational purpose.

To illustrate, imagine a $5,000 withdrawal from a 529 plan to buy a car for commuting. If the account is composed of 80% contributions ($4,000) and 20% earnings ($1,000), only the earnings portion is penalized. The $1,000 in earnings would be added to the recipient’s taxable income for the year and would also incur a $100 penalty (10% of $1,000). The remaining $4,000, representing the original contributions, would be received without any tax or penalty.

Documenting and Reporting 529 Withdrawals

It is the account owner’s responsibility to prove that withdrawals were used for qualified expenses. This means retaining all relevant receipts and invoices for tuition, fees, required books, and other eligible costs. These documents serve as the necessary proof if the IRS questions the tax-free nature of a withdrawal.

At the end of the tax year, the 529 plan administrator will issue Form 1099-Q, Payments From Qualified Education Programs, to the recipient of the funds. This form reports the total amount of the distribution and the earnings portion of that distribution. This form is informational and does not calculate whether any tax is owed.

The taxpayer who received the funds is responsible for reconciling the total withdrawals reported on Form 1099-Q with their documented QHEEs for the year. If the total withdrawals are less than or equal to the amount of adjusted qualified expenses, the distributions are tax-free. If withdrawals exceed the qualified expenses, the taxpayer must calculate the taxable portion of the earnings and report it as “Other Income” on their federal tax return, along with any applicable penalty.