Can You Use a 529 Plan for a College Apartment?

Saving for college often involves navigating various financial tools, and 529 plans stand out as tax-advantaged savings vehicles. These plans are designed to help families accumulate funds for future education expenses, offering tax benefits on earnings when withdrawals are used for qualified costs. A common question arises regarding the flexibility of these funds, particularly whether they can be applied to living expenses like college apartments.

Understanding Qualified Expenses

The Internal Revenue Service (IRS) defines categories of “qualified higher education expenses” that allow 529 plan withdrawals to be tax-free. These include tuition and required fees for enrollment at an eligible educational institution, as well as books, supplies, and equipment necessary for coursework. Additionally, expenses for special needs services required by the student can be considered qualified. These expenses must be incurred by a student attending an institution eligible to participate in federal student aid programs.

Housing Expenses and 529 Plans

Housing expenses, including college apartments, can be considered qualified expenses under specific conditions. The student must be enrolled at least half-time in a degree, certificate, or other recognized educational credential program at an eligible institution. Half-time enrollment typically means 6 or more credit hours per semester for undergraduates, though this can vary by institution.

For on-campus housing, such as dormitory fees and university meal plans, are generally qualified expenses. For off-campus college apartments, rent and essential utilities like electricity, gas, water, and internet can also be qualified. However, certain items are not covered, including furniture purchases, non-educational cable TV services, and refundable security deposits. The housing must be directly related to the student’s attendance at the eligible institution.

A limitation for housing expenses is that the amount withdrawn from a 529 plan cannot exceed the allowance for room and board determined by the educational institution. This allowance is part of the school’s Cost of Attendance (COA) for federal financial aid purposes. If the actual housing expenses are less than the COA allowance, only the actual amount paid can be considered qualified.

Navigating the Cost of Attendance Limit

Students or parents can determine the school’s room and board allowance by contacting the financial aid office or checking the institution’s website. This information is usually found under the financial aid or bursar sections and outlines estimated costs for both on-campus and off-campus living.

The school’s COA allowance for room and board must be compared to the actual housing expenses incurred for the college apartment. Only the lesser of these two figures can be considered a qualified expense for 529 plan purposes. For example, if a university’s COA for off-campus room and board is $10,000 per academic year, but the student’s actual rent and utilities total $12,000, only $10,000 can be paid with 529 funds without tax implications. Conversely, if actual expenses are $8,000, only that amount can be covered. Any amount withdrawn from the 529 plan for housing that exceeds this limit is considered a non-qualified withdrawal.

Required Documentation

Maintaining records is important when making withdrawals from a 529 plan for educational expenses. These records are crucial for substantiating qualified expenses in the event of an IRS audit.

Documentation to retain includes school tuition bills and statements, which confirm enrollment and direct educational costs. For off-campus housing, copies of the lease agreement, rent receipts, or bank statements showing rent payments are necessary. Utility bills for electricity, gas, water, and internet service should also be kept. Proof of half-time enrollment, such as academic transcripts or official enrollment verification from the institution, is also important. Finally, official documents from the school detailing the Cost of Attendance (COA) for room and board should be readily accessible.

Tax Treatment of Non-Compliant Withdrawals

If 529 plan funds are withdrawn for non-qualified expenses, or if the amount for housing exceeds the Cost of Attendance limit, tax consequences apply. The earnings portion of a non-qualified withdrawal becomes subject to federal income tax, meaning investment gains used for non-qualified purposes will be taxed as ordinary income.

A 10% additional federal tax (penalty) is generally imposed on the earnings portion of the non-qualified withdrawal, discouraging use for non-qualified purposes. Certain exceptions can waive this 10% penalty, such as the death or disability of the beneficiary, or if the beneficiary receives a scholarship. The earnings portion subject to tax and penalty is calculated on a pro-rata basis, meaning a portion of each withdrawal is considered to be earnings and a portion is considered to be the original contribution.