Can You Use a 529 Plan for Tutoring Expenses?
Understand whether 529 plans can cover tutoring expenses, how eligibility is determined, and the potential tax implications of nonqualified withdrawals.
A 529 plan helps families save for education while offering tax advantages, but not all expenses qualify for tax-free withdrawals. Using funds for nonqualified costs can result in penalties.
What 529 Plans May Cover
A 529 plan covers various education-related expenses, but only certain costs qualify for tax-free withdrawals. Eligible expenses include tuition and mandatory fees at accredited colleges, universities, and vocational schools that participate in federal student aid programs.
Room and board expenses qualify if the student is enrolled at least half-time. The allowable amount is typically capped at the school’s published cost of attendance. Off-campus housing, including rent and utilities, may be covered but only up to the school’s stated housing allowance.
Books, supplies, and required equipment also qualify. This includes textbooks, lab materials, and software necessary for coursework. Computers, printers, and internet access are eligible if primarily used for education.
For K-12 education, up to $10,000 per year can be used for private school tuition. Additionally, 529 funds can be applied toward repaying up to $10,000 in student loans for the beneficiary or their siblings.
Whether Tutoring Expenses Qualify
Tutoring is generally not considered a qualified expense under 529 plan rules. The IRS does not include tutoring in its definition of eligible education costs.
529 plans cover expenses directly tied to enrollment and attendance at an eligible institution, such as tuition, required fees, and necessary materials. Tutoring, even if it helps a student succeed in a required course, is considered supplemental rather than essential.
An exception exists for tutoring that is part of a required special education program. If a licensed professional prescribes tutoring as necessary for a student with disabilities, it may qualify as an eligible expense. However, general academic tutoring does not meet the criteria.
Tax Implications for Nonqualified Costs
Using 529 funds for nonqualified expenses has financial consequences. The earnings portion of the withdrawal becomes subject to federal income tax, eliminating the tax-free growth benefit. The earnings are taxed at the recipient’s ordinary income tax rate.
Additionally, the IRS imposes a 10% penalty on the earnings portion of nonqualified withdrawals. For example, if a $5,000 withdrawal includes $1,500 in earnings, the penalty would be $150. Contributions are not taxed or penalized, as they were made with after-tax dollars.
Certain exceptions waive the 10% penalty, such as when the beneficiary receives a tax-free scholarship, attends a U.S. military academy, or becomes disabled. However, income tax on earnings still applies.
Record-Keeping for Plan Distributions
Maintaining accurate records of 529 withdrawals is essential for IRS compliance. Plan administrators do not verify whether distributions are used for qualified expenses, so the account holder must keep documentation. Without proper records, withdrawals could be deemed nonqualified, leading to taxes and penalties.
Receipts, invoices, and billing statements should be retained to show how funds were spent. Payments made directly to an educational institution are easier to verify, but distributions sent to the beneficiary or account owner require additional proof. Tuition bills, course syllabi listing required materials, and receipts for room and board expenses help substantiate withdrawals.