Can You Use a 529 for Graduate School Room and Board?
Using a 529 plan for graduate school housing involves more than just paying rent. Understand the key distinctions and limits to maximize your tax-free benefits.
Yes, you can use a 529 plan to pay for room and board during graduate school, but Internal Revenue Service (IRS) rules apply. A 529 plan is a tax-advantaged savings account for educational purposes. Its benefits extend to eligible graduate and professional programs, making it a useful tool for financing advanced degrees.
Defining Qualified Room and Board Expenses
For a graduate student’s room and board to be a qualified higher education expense (QHEE), the student must be enrolled at least half-time. This enrollment status is a prerequisite for using 529 funds for housing. The rules for determining the maximum qualified withdrawal amount differ based on where the student lives.
On-Campus Housing
When a student lives in housing owned or operated by the university, the qualified amount for room and board is the actual charge billed by the institution. If the university’s bill for a semester includes a $7,000 charge for a dorm room and meal plan, the 529 plan can distribute up to $7,000 to cover that cost tax-free.
Off-Campus Housing
For students in off-campus housing, the qualified withdrawal amount is limited by the room and board allowance in the school’s official “cost of attendance” (COA). The COA is an estimate published by the institution for one academic year’s total costs, including living expense allowances, and is found on the university’s financial aid website.
The COA sets the ceiling on tax-free withdrawals for off-campus housing and food. For example, if a school’s COA allows $14,000 for room and board, that is the maximum that can be withdrawn from a 529 plan for rent, utilities, and groceries. If the student’s actual expenses total $16,000, only $14,000 of the withdrawal is qualified and tax-free.
Other Qualified Graduate School Expenses
Beyond room and board, 529 plans can cover other qualified expenses for graduate school. The primary qualified expense is tuition and mandatory fees required for enrollment or attendance at an eligible institution. This includes costs like student activity or technology fees.
Funds can also be withdrawn for books, supplies, and equipment required for the student’s courses. This includes a computer, peripheral equipment, software, and internet access, but only if the school requires such technology for enrollment or attendance. Items purchased for personal convenience do not qualify.
Making a Qualified Withdrawal
To ensure a 529 distribution is tax-free, the taxpayer must prove the funds were used for qualified expenses. This requires careful record-keeping and attention to timing. You should gather all relevant documentation before taking a distribution.
For off-campus housing, this includes:
- A signed lease agreement
- Receipts for rent payments
- Receipts for utilities and groceries
- A copy of the school’s published COA for the academic year
For on-campus housing, the university’s official bill is the primary document.
Withdrawals can be paid directly to the institution or to the account owner or beneficiary as a reimbursement. The withdrawal must occur in the same calendar year that the expense was paid. For example, if you pay a spring semester tuition bill in December 2024, the 529 withdrawal must be made before the end of 2024.
Tax Implications and Reporting
When 529 withdrawals are equal to or less than the student’s adjusted qualified higher education expenses (AQHEE), the earnings portion of the distribution is free from federal and, in most cases, state income tax.
If a withdrawal exceeds qualified expenses, the earnings portion of the excess is a non-qualified distribution. This amount is subject to ordinary income tax plus a 10% federal penalty tax, and some states may impose additional penalties. The original contributions are always returned tax- and penalty-free.
After a distribution, the 529 plan administrator issues Form 1099-Q, “Payments From Qualified Education Programs,” to the recipient. This form details the gross distribution, earnings, and basis. The recipient uses this form to reconcile the withdrawal against their qualified expenses on their tax return.
You cannot use the same expenses to justify both a tax-free 529 withdrawal and an education tax credit, like the Lifetime Learning Credit. A taxpayer must reduce their total qualified expenses by the amount used to claim the credit before determining the amount that can be covered by a tax-free 529 withdrawal.