Is Parking a Qualified 529 Expense?

A 529 plan is a tax-advantaged savings account designed for future education costs. These benefits are contingent on using the funds for specific, approved expenses. The rules governing these plans determine which costs are eligible for tax-free withdrawals. This article clarifies what constitutes a qualified expense and addresses whether parking fees are covered.

Defining Qualified Higher Education Expenses

The Internal Revenue Service (IRS) defines Qualified Higher Education Expenses (QHEEs) in Publication 970. These are costs required for enrollment or attendance at an eligible postsecondary institution. The primary category is tuition and fees, which includes any mandatory charges billed by the institution as a condition of attendance.

Another category of QHEEs includes books, supplies, and equipment required for a student’s courses. This can also extend to computer hardware, software, and internet access, provided they are used primarily by the beneficiary during their enrollment.

Room and board expenses also qualify for students who are enrolled at least half-time. These costs are limited to the allowance for room and board as determined by the school’s official cost of attendance figures. This applies to both on-campus and off-campus living arrangements, covering expenses like rent and food up to the specified limit.

Other permitted expenses include costs for special needs services necessary for a student to attend college. Up to $10,000 per year can be used for tuition at an elementary or secondary school. A lifetime limit of $10,000 can also be applied to repay qualified student loans for the beneficiary or their sibling.

The Status of Parking and Transportation Costs

Parking fees are not considered a qualified higher education expense when paid for as a separate, optional item. The IRS views most transportation costs, including gas, public transit passes, and optional parking permits, as personal living expenses. Even if commuting is necessary, the associated costs are not eligible for tax-free withdrawal from a 529 plan.

A parking fee may be considered a qualified expense if it is mandatory for all students as a condition of enrollment and is billed by the university on the tuition statement. This often occurs when a university bundles various charges into a comprehensive fee that every student must pay.

The distinction rests on whether the expense is required and how it is billed. For example, purchasing a parking permit from the campus parking office is a non-qualified expense. In contrast, a mandatory transportation fee on the main tuition bill that includes parking access is more likely to be considered a qualified expense.

Qualified expenses must be necessary for enrollment, and optional services do not meet this standard. Account holders should review the student’s tuition and fee statement to determine if a parking-related charge is listed as a mandatory institutional fee before using 529 funds.

Consequences of Non-Qualified Withdrawals

Using 529 plan funds for a non-qualified expense, such as an optional parking permit, results in financial penalties. The earnings portion of a non-qualified withdrawal is subject to both ordinary income tax and a 10% federal tax penalty. These taxes and penalties apply only to investment earnings, not the original contributions.

The plan administrator issues IRS Form 1099-Q, which reports the total withdrawal and breaks it down into principal and earnings. The recipient is responsible for reporting the taxable earnings on their income tax return. Some states may also require the recapture of prior state tax deductions for contributions if a non-qualified withdrawal is made.

To illustrate, consider a withdrawal of $500 for a non-qualified purpose. If the 529 account’s earnings represent 40% of its total value, then $200 of that withdrawal would be considered earnings. This $200 is then subject to ordinary income tax at the recipient’s tax rate, plus an additional federal penalty of $20 (10% of $200).

Certain exceptions can waive the 10% penalty, though the earnings may still be subject to income tax. These situations include the death or disability of the beneficiary, receiving a tax-free scholarship, or attendance at a U.S. military academy. Using 529 funds for non-qualified costs reduces the tax-advantaged growth of the account.