Is Rent a Qualified 529 Plan Expense?

A 529 plan is a tax-advantaged savings account designed to help families pay for education costs. These accounts offer tax-free growth and withdrawals for approved expenses like tuition, but the rules are more complex for costs like a student’s housing. Many parents and students question whether rent for an off-campus apartment is a permissible use of 529 plan funds.

Defining Qualified Housing Costs

Room and board can be paid for with 529 plan funds, but they are considered qualified higher education expenses (QHEEs) only under specific IRS conditions. The rules for qualified housing costs depend on the student’s living situation and enrollment status.

A primary requirement is that the student must be enrolled at least half-time for housing costs to qualify. The college or university defines “half-time,” so you must confirm the student’s status with the school. If a student drops below this threshold, 529 plan withdrawals used for their housing during that period are considered non-qualified.

For students living in university-owned housing, the qualified expense is the actual amount the college charges for room and board. This figure appears on the student’s bill from the institution, making it easy to document the amount that can be withdrawn from the 529 plan tax-free.

For students who live off-campus, rent is a qualified expense, but the amount that can be withdrawn is limited. The withdrawal cannot exceed the allowance for room and board in the school’s official “cost of attendance” (COA). The COA figures set a ceiling on what is considered a reasonable housing expense for a student in that area.

Calculating the Off-Campus Housing Allowance

To find the maximum withdrawal amount for off-campus rent, you must locate the school’s cost of attendance data, which is published on the financial aid office’s website. The COA provides separate figures for students living on-campus, off-campus, and with parents; use the specific allowance for off-campus room and board.

The amount you can treat as a qualified housing expense is determined by the “lesser of” rule. It is the lesser of the student’s actual housing costs for the academic period or the school’s COA allowance for off-campus room and board.

For example, imagine a university’s COA specifies a room and board allowance of $14,000 for the academic year. If the student’s actual rent and utilities for that period total $1,200 per month ($14,400 for the year), only $14,000 can be withdrawn tax-free from the 529 plan. Conversely, if their actual costs are $1,000 per month ($12,000 for the year), the qualified withdrawal is limited to the actual cost of $12,000.

Tax Consequences of Non-Qualified Withdrawals

A distribution from a 529 plan that exceeds the qualified amount has financial repercussions. These consequences apply only to the earnings portion of the non-qualified withdrawal; original contributions are always returned tax-free. The earnings portion must be reported as ordinary income on the recipient’s tax return and is taxed at their marginal rate. The recipient is the student if the funds are sent to them, or the account owner if the funds are sent to the owner.

In addition to ordinary income tax, the earnings are also subject to a 10% federal tax penalty. For instance, if a $2,000 non-qualified withdrawal consists of $800 in earnings, that $800 is subject to both income tax and an additional $80 penalty.

Beyond federal implications, there may be state-level tax consequences. Many states that offer an income tax deduction for 529 plan contributions require a “recapture” of that deduction for non-qualified withdrawals. This means you may have to pay back previous state tax savings in addition to any state income tax on the earnings.

Recordkeeping for Housing Expenses

Account owners using 529 funds for off-campus housing must maintain detailed records. In an audit, the taxpayer has the burden of proof to show that withdrawals were used for qualified expenses and are not subject to tax or penalty.

For off-campus rent, documentation includes a copy of the signed lease agreement showing the monthly rent and lease term. You should also keep canceled checks, bank statements showing electronic rent payments, or payment confirmations from the landlord.

The 529 plan administrator issues IRS Form 1099-Q, which reports the gross distribution and its earnings portion to you and the IRS. Because this form does not detail how the money was spent, your records are needed to reconcile the withdrawal with the qualified expenses you paid.

You should keep these records for at least three years after the tax year of the withdrawal, which is the general statute of limitations for an IRS audit. Storing digital copies in a secure location can ensure they are accessible if needed.