Is Off-Campus Housing Covered by a 529 Plan?

A 529 plan is a tax-advantaged savings account designed for future education costs. Funds grow federally tax-deferred, and withdrawals are tax-free for qualified expenses. A common question for families is whether these funds can be applied to off-campus housing, which involves specific rules for what qualifies.

Defining Qualified Room and Board Expenses

For housing costs to be considered a qualified higher education expense, the student must be enrolled at least half-time at an eligible institution. This enrollment status is defined by the school itself, which sets a specific number of credit hours that constitute a half-time course load. This information can be found on the school’s website or by contacting the registrar’s office.

This half-time rule applies whether the student lives in a dormitory or an off-campus apartment. If a student drops below this threshold, any subsequent rent payments for that period would not be considered qualified expenses.

Calculating the Maximum Allowance for Off-Campus Housing

The amount of 529 funds that can be withdrawn for off-campus housing is not simply the total of your rent and utility payments. The withdrawal amount is governed by the school’s official Cost of Attendance (COA) figure. Every accredited institution calculates a COA, which is an estimate of what it costs a student to attend for one academic year. This budget includes tuition, fees, and a specific allowance for room and board, which can be found on the college’s financial aid website.

The qualified expense is the lesser of the student’s actual housing costs or the school’s COA allowance for room and board. For example, if the school’s COA lists the room and board allowance as $12,000 for the year, but the student’s actual rent and utilities total $14,000, only $12,000 can be taken as a qualified distribution. Conversely, if the student’s actual costs were only $10,000, then only $10,000 would be a qualified expense. It is important to locate the correct COA figure for off-campus students, as it may differ from the on-campus housing charge.

Required Documentation for Withdrawals

While 529 plan administrators do not usually ask for receipts before distributing funds, the responsibility for proving the legitimacy of the withdrawal rests with the account owner. In the event of an IRS audit, you must be able to substantiate that the funds were used for qualified room and board expenses. Failure to provide adequate proof can result in the earnings portion of the withdrawal being subject to income tax and a 10% federal penalty tax.

To prepare for this, you should retain a complete set of documents that validate housing costs. These records create a clear paper trail and should include:

• A copy of the fully executed lease agreement showing the student’s name, the rental term, and the monthly rent amount.
• Canceled checks, bank statements, or digital payment confirmations that show rent was paid.
• Copies of bills for utilities like electricity, water, gas, and internet, as these are included in the room and board allowance.

Process for Using 529 Funds

Once you have confirmed eligibility and calculated the maximum withdrawal amount, you can access the funds. The most common method is to request a distribution payable directly to the account owner. The owner then uses these funds to pay the landlord or utility companies. Some 529 plans may offer to send a payment directly to a third party, such as the landlord, but this is less common for off-campus housing. It is important to align the timing of the withdrawal with the payment of the expense within the same calendar year.

Following the end of the tax year, the 529 plan administrator will issue IRS Form 1099-Q. This form reports the gross distribution amount taken from the plan. It is the account owner’s responsibility to reconcile this amount with their records of qualified expenses to demonstrate that the funds were used properly and are not subject to tax or penalty.