Can You Use a 529 Plan for Trade School?

A 529 plan is a tax-advantaged savings vehicle designed to help families save for future education expenses. These plans, typically sponsored by states or educational institutions, allow funds to grow free from federal income tax. Earnings are not subject to federal or generally state tax when withdrawals are used for qualified education expenses.

Eligible Educational Institutions

An eligible educational institution, for 529 plan purposes, is broadly defined by federal tax law. This includes any college, university, vocational school, or other postsecondary institution eligible to participate in student aid programs administered by the U.S. Department of Education. Many trade schools, technical colleges, and vocational programs qualify, not just traditional four-year universities.

To determine if a specific trade school or vocational program is eligible, it generally needs a federal school code or the ability to accept federal financial aid. Examples of qualifying institutions include culinary institutes, automotive technology programs, and cosmetology schools. Qualified apprenticeship programs registered with the U.S. Department of Labor under the National Apprenticeship Act are also considered eligible.

Covered Expenses

Funds from a 529 plan can cover “qualified education expenses” when attending an eligible trade school or vocational program. These include tuition and fees. Necessary books, supplies, and equipment required for the program, such as specialized tools, also qualify. The cost of computer technology, related equipment, and internet access, if used by the beneficiary during enrollment, is also a qualified expense.

Room and board expenses can be covered if the student is enrolled at least half-time. The amount is limited to the institution’s cost of attendance allowance for students living on or off campus, or the actual cost if less. For registered apprenticeship programs, qualified expenses include fees, books, supplies, and equipment specifically required for participation. Special needs expenses for a beneficiary are also qualified if incurred in connection with enrollment or attendance at an eligible institution.

Making Withdrawals

Withdrawing funds from a 529 plan generally involves a direct request to the plan administrator. Most plans offer online, mail, or phone options for initiating withdrawals. Account owners can choose to have funds sent directly to the educational institution, to the account owner, or to the beneficiary. Direct payment to the school can simplify tax record-keeping.

Align withdrawals with the calendar year in which qualified expenses are incurred. For example, if tuition is paid in December for a spring semester starting in January, the withdrawal should occur in the same calendar year as the payment. Maintain records, such as receipts, invoices, and enrollment verification, to substantiate that withdrawals were used for qualified education expenses. Qualified withdrawals are exempt from federal and generally state income tax on the earnings portion.

Implications of Non-Qualified Withdrawals

If funds are withdrawn from a 529 plan and not used for qualified education expenses, the earnings portion becomes subject to federal income tax. A 10% federal tax penalty is typically applied to the earnings portion of such non-qualified withdrawals. This penalty aims to discourage the use of 529 funds for purposes other than education.

There are exceptions to the 10% federal penalty, though earnings may still be subject to income tax. These include if the beneficiary receives a tax-free scholarship, becomes disabled, or dies. The penalty may also be waived if the beneficiary attends a U.S. military academy, or if expenses were used to generate federal education tax credits like the American Opportunity Tax Credit or Lifetime Learning Tax Credit. The individual receiving the non-qualified distribution (account owner or beneficiary) is responsible for reporting and paying any applicable taxes.