How to Use a 529 Plan in WV for Education Expenses

Saving for education can be challenging, but a 529 plan offers tax advantages that make it easier to set aside money for future expenses. West Virginia’s SMART529 program provides residents with a way to invest in education while benefiting from tax incentives. Understanding how to use these funds correctly ensures you maximize their benefits without unexpected penalties.

Enrollment Steps

Opening a SMART529 account begins with choosing between a direct-sold or advisor-sold plan. The direct-sold plan allows individuals to enroll online without an advisor, typically with lower fees. The advisor-sold plan offers professional guidance but may come with higher costs. Evaluating fees, investment options, and financial goals helps in making the right choice.

After selecting a plan, the next step is completing the application, which requires basic personal details, including the account owner’s Social Security number and the beneficiary’s information. A minimum initial contribution—typically $25 for the direct-sold plan—is required. Contributions can be made through one-time payments, automatic transfers, or payroll deductions if offered by an employer.

Investment options include age-based portfolios that adjust risk levels as the beneficiary nears college and static portfolios that maintain a fixed asset allocation. Reviewing historical performance, fees, and risk levels is essential. Lower-risk alternatives, such as FDIC-insured bank options, are also available.

Account Ownership

The account owner controls contributions, investment choices, and withdrawals. Parents and grandparents commonly hold this role, but any individual or legal entity can open an account. Unlike custodial accounts, where assets transfer to the beneficiary at adulthood, a 529 plan remains under the owner’s control indefinitely, allowing flexibility if educational plans change.

West Virginia residents benefit from a state income tax deduction on contributions—up to $5,000 per year for single filers and $10,000 for joint filers. Since the deduction applies per account owner rather than per beneficiary, opening multiple accounts for different children or grandchildren can increase the total deductible amount. While federal tax deductions are not available, earnings grow tax-free, and withdrawals remain untaxed when used for qualified education expenses.

529 plans also impact financial aid eligibility. A parent-owned account is assessed at a maximum of 5.64% of its value when calculating the Expected Family Contribution (EFC) on the Free Application for Federal Student Aid (FAFSA). Grandparent-owned accounts do not count as assets on FAFSA but were previously considered untaxed student income when withdrawals were made. FAFSA changes for the 2024-25 academic year eliminate this reporting requirement, making grandparent-owned 529 plans more favorable for financial aid considerations.

Qualified Education Expenditures

Using SMART529 funds for eligible expenses ensures withdrawals remain tax-free and avoid penalties. The IRS defines qualified education costs under Section 529 of the Internal Revenue Code. Misusing funds results in a 10% penalty on earnings and federal income tax liability.

Tuition

SMART529 funds cover tuition at public and private institutions, including undergraduate, graduate, and professional degree programs at schools recognized by the U.S. Department of Education. This includes universities, community colleges, and certain vocational schools.

For K-12 education, up to $10,000 per year can be withdrawn tax-free for private school tuition. This limit applies per student, not per account, meaning multiple 529 plans for the same beneficiary do not increase the allowable withdrawal.

Payments can be sent directly to the institution or reimbursed to the account owner. Direct payments help ensure compliance with IRS guidelines. If tuition is covered by scholarships, only the portion not funded by the award should be withdrawn to avoid unnecessary taxation.

Room and Board

Housing costs qualify if the student is enrolled at least half-time. This includes on-campus dormitory fees and off-campus rent, provided the amount does not exceed the school’s published cost of attendance for housing. Checking with the financial aid office ensures compliance with these limits.

Utilities, internet, and meal plans qualify if they are part of the school’s official cost estimates. However, discretionary expenses like furniture, decorations, or groceries beyond the meal plan are not covered. Students living at home cannot use 529 funds for rent or mortgage payments.

Keeping receipts and obtaining a copy of the school’s housing cost estimate is recommended. If audited, the IRS may require proof that withdrawals align with allowable expenses.

Academic Supplies

Books, lab equipment, and technology necessary for coursework qualify as educational expenses. Required textbooks, whether new, used, or digital, are eligible if listed on the course syllabus. Supplies such as calculators, art materials for design courses, and safety gear for lab work also meet the criteria.

Computers, software, and internet access qualify if primarily used for school. This includes laptops, tablets, and printers but excludes gaming consoles or entertainment subscriptions. Software must be educational or required for coursework, meaning general productivity tools like Microsoft Office qualify, while video editing software for personal use does not.

Non-essential items such as backpacks, dorm furniture, and club fees are not considered qualified expenses. Keeping receipts and maintaining a record of required materials for each course helps ensure compliance. If an expense is questionable, consulting IRS Publication 970 or a tax professional can help determine eligibility.

Tax Reporting

Proper tax treatment of SMART529 contributions and withdrawals ensures compliance with federal and state regulations. While contributions are not deductible on federal returns, West Virginia residents can claim a state income tax deduction. Account owners should retain detailed records of contributions, including dates and amounts, to substantiate deductions in case of an audit. Contributions exceeding the annual gift tax exclusion—$18,000 per beneficiary for 2024 ($36,000 for married couples electing to split gifts)—must be reported on IRS Form 709, though they typically do not trigger immediate tax liability unless they surpass the lifetime gift exemption.

Withdrawals require documentation to confirm they align with IRS-qualified expenses. When distributions are made, the plan administrator issues Form 1099-Q, which reports the total withdrawal amount and the portion attributable to earnings. If the beneficiary receives the distribution, the earnings portion is reported under their Social Security number, potentially affecting their tax liability. If the account owner receives the distribution, they bear responsibility for any taxes owed on non-qualified withdrawals. To avoid complications, withdrawals should match eligible expenses incurred in the same tax year, as any excess may be subject to ordinary income tax and a 10% penalty on the earnings portion.