Can You Use a 529 Plan for Law School?

529 plans are tax-advantaged savings vehicles designed to help families save for future education expenses. These plans are sponsored by states, state agencies, or educational institutions, offering a way to accumulate funds that can be used for various qualified educational costs. The primary purpose of a 529 plan is to encourage saving for higher education, encompassing both undergraduate and graduate studies. Funds invested in a 529 plan grow tax-deferred, providing a significant advantage for long-term savings goals.

Qualified Education Expenses for Law School

529 plans can be used for expenses associated with attending law school, as these programs fall under eligible higher education. They cover qualified education expenses for graduate studies. The Internal Revenue Service (IRS) defines these as costs directly related to enrollment and attendance at an eligible educational institution.

Tuition and fees are qualified expenses for law school. Books, supplies, and equipment required for enrollment or attendance also qualify. This includes computers, software, internet access, and other equipment primarily used by the beneficiary during enrollment.

Room and board expenses also qualify if the student is enrolled at least half-time. The qualified amount cannot exceed the institution’s allowance for federal financial aid purposes, or the actual amount paid for institutional housing. Special needs services also qualify if incurred for a special needs beneficiary during enrollment.

Tax Benefits and Considerations for 529 Withdrawals

A key feature of a 529 plan is tax-free qualified withdrawals. When used for qualified education expenses, neither the principal nor earnings are subject to federal income tax. This tax exemption leads to substantial long-term savings.

Many states offer varying tax benefits for 529 plans. These may include state income tax deductions or credits for contributions, or tax-free withdrawals for qualified expenses. Researching your state’s rules can enhance tax efficiency.

If a withdrawal is not used for qualified education expenses, the earnings portion is subject to federal income tax at the account owner’s ordinary rate. A 10% federal penalty tax also applies to the earnings, discouraging non-educational use.

Exceptions to the 10% penalty exist, even if the withdrawal is not for qualified education expenses. These include withdrawals due to:
The beneficiary receiving a tax-free scholarship.
Attending a U.S. military academy.
Becoming disabled.
Becoming deceased.

In these cases, the 10% penalty is waived, though earnings may still be taxed. Accurate records of expenses and distributions are essential for IRS compliance.

Coordination with Other Financial Aid

Using a 529 plan for law school requires coordination with other financial aid, such as scholarships and grants. If a student receives a tax-free scholarship or grant covering qualified expenses, the tax-free 529 distribution amount is reduced by the scholarship amount. The IRS prohibits double-dipping on tax benefits.

With a scholarship, students can withdraw 529 funds up to the scholarship amount without the 10% federal penalty tax on earnings. However, those earnings remain subject to federal income tax. This provides flexibility when external financial assistance is received.

529 plans also complement student loans. Using 529 funds can reduce reliance on student loans. This leads to interest savings, as 529 distributions for qualified expenses are tax-free, unlike interest-accruing student loans.

For federal financial aid, 529 assets are generally parental assets if the account owner is a parent. Their impact on aid eligibility is less significant than other asset types, typically assessed at a lower percentage (e.g., up to 5.64% of value). This makes 529 plans a favorable asset for financial aid.