Can You Use a 529 Plan for Medical School?

Medical school represents a significant financial undertaking. 529 plans offer a tax-advantaged savings vehicle for educational expenses. These plans allow contributions to grow tax-free and qualified withdrawals to be exempt from federal income tax. While primarily known for undergraduate studies, 529 plans can be utilized for graduate-level programs, including medical school.

Understanding Qualified Education Expenses for Medical School

When using a 529 plan for medical school, it is important to understand what expenses qualify for tax-free withdrawals. Qualified education expenses are costs required for enrollment or attendance at an eligible educational institution. This includes a broad range of expenses directly related to a student’s medical education.

Tuition and mandatory fees are qualified expenses. This covers the core costs of attending medical school. These direct educational charges are eligible for 529 plan funding.

Books, supplies, and equipment necessary for coursework also qualify. For medical students, this includes textbooks, medical instruments, lab coats, and other specialized supplies essential for their studies and clinical rotations.

Room and board expenses also qualify, provided the student is enrolled at least half-time. The qualified amount is limited to the allowance for room and board included in the school’s cost of attendance for federal financial aid purposes, or the actual amount charged if living in institution-operated housing. This can cover on-campus housing, off-campus rent, and meal plans, aligning with the school’s determined cost of attendance.

Special needs services required by a beneficiary due to a disability are qualified expenses. Computer technology and related services, such as internet access and software, also qualify if primarily used by the beneficiary during their enrollment. This can include a new laptop or medical-specific software.

Non-Qualified Withdrawals and Tax Implications

Using 529 plan funds for non-qualified expenses can lead to tax consequences. If a withdrawal is non-qualified, the earnings portion becomes subject to federal income tax. This means any investment growth will be taxed at the recipient’s ordinary income tax rate.

A 10% federal penalty tax typically applies to the earnings portion of non-qualified withdrawals. Only the earnings are subject to this tax and penalty, as original contributions are returned tax-free. Some states may also impose additional taxes or penalties on non-qualified distributions.

Specific exceptions exist for the 10% federal penalty tax, though earnings may still be subject to income tax. For instance, if the beneficiary receives a tax-free scholarship, the penalty can be waived on withdrawals up to the scholarship amount. Other exceptions include the death or disability of the beneficiary, attendance at a U.S. military academy, or receipt of certain employer-provided educational assistance.

The individual receiving the non-qualified distribution is generally responsible for paying the taxes. If the withdrawal is payable to the account owner, they report the taxable earnings and any applicable penalties. If the distribution is made directly to the beneficiary, the beneficiary is responsible for these tax obligations. Account owners must maintain accurate records, as distributions trigger a 1099-Q tax form.

529 Plans and Financial Aid for Medical Students

A 529 plan can influence a medical student’s eligibility for need-based financial aid, as determined by the Free Application for Federal Student Aid (FAFSA). The impact depends significantly on who owns the 529 account.

A 529 plan is generally considered an asset of the account owner, and its value is factored into the Student Aid Index (SAI), formerly known as the Expected Family Contribution (EFC).

For parent-owned 529 plans, assets are assessed at a low percentage on the FAFSA, typically a maximum of 5.64% of their value. Qualified distributions from parent-owned 529 accounts are not counted as income on the FAFSA.

If a dependent student is the owner and beneficiary of a 529 plan, it is treated as a parental asset with the same assessment rate. For independent students without dependents other than a spouse who own their 529 plans, assets are assessed at a higher rate, often up to 20% of the account value. This higher assessment rate can lead to a greater reduction in financial aid eligibility.

A significant change with the FAFSA Simplification Act, effective for the 2024-2025 academic year and beyond, impacts grandparent-owned 529 plans. Under the new rules, these accounts are no longer reported as an asset on the FAFSA, nor are qualified distributions from them counted as untaxed income to the student.

Scholarships and grants interact with 529 plans. If a medical student receives scholarships or grants, these reduce the amount of qualified education expenses that can be paid with 529 funds tax-free. If a scholarship covers tuition, 529 funds would then be used for other qualified expenses like room and board or books. If total scholarships and grants exceed qualified expenses, any remaining 529 funds withdrawn could be subject to taxes on earnings, though the 10% penalty might be waived up to the scholarship amount.