What Can 529 Funds Be Used for Besides College?

A 529 plan is a tax-advantaged savings account designed to help families set aside funds for future education costs. Historically, these plans were for paying for college tuition and related expenses. Recent federal legislative changes, however, have broadened the scope of what these funds can be used for, providing account holders with more flexibility. These expansions acknowledge the diverse educational paths individuals may take beyond the traditional university model.

K-12 Private School Tuition

One of the earliest expansions to 529 plan usage was the inclusion of tuition for elementary and secondary education. Account holders can withdraw funds to pay for tuition at public, private, or religious K-12 schools. This allows families to use the tax-advantaged growth of their 529 accounts to manage the costs of private schooling.

The amount that can be withdrawn for K-12 tuition is capped at $10,000 per year, per beneficiary. This limit applies only to tuition expenses; other school-related costs like uniforms or transportation are not considered qualified expenses. The tax treatment of these withdrawals can differ at the state level, as some states may not conform to the federal definition, potentially subjecting such withdrawals to state income tax.

Apprenticeship and Vocational Programs

Recognizing the value of skilled trades, 529 funds can now be used for costs associated with certain apprenticeship and vocational programs. This allows beneficiaries to pursue careers in fields like construction or manufacturing without being limited to a traditional academic degree.

For an apprenticeship program to qualify, it must be registered and certified with the U.S. Secretary of Labor under the National Apprenticeship Act. Qualified expenses for these programs include required fees, books, supplies, and equipment. Funds can also cover expenses at post-secondary vocational or trade schools, provided the institution is accredited and eligible to participate in federal student aid programs.

Repaying Student Loans

Another expansion allows for the use of 529 plan funds to pay down existing student loan debt. This provision offers relief to graduates with leftover funds or for families who wish to help multiple children manage their educational debt.

Under federal law, there is a lifetime limit of $10,000 that can be withdrawn from a 529 plan to repay the principal and interest on a qualified education loan for the plan’s beneficiary. This is a total cap per individual. The law also includes a provision for family members, allowing a separate $10,000 lifetime maximum to be used for the qualified student loans of each of the beneficiary’s siblings.

Rollovers to a Roth IRA

A recent change allows for rolling over unused 529 plan funds into a Roth Individual Retirement Account (IRA). This option, introduced by the SECURE 2.0 Act, addresses a common concern about leftover money if a beneficiary doesn’t attend college or has funds remaining after graduation. It transforms a dedicated education account into a tool for long-term retirement savings.

This rollover is subject to several conditions. The transfer must be made to a Roth IRA in the name of the 529 plan’s beneficiary, who must have earned income at least equal to the amount being rolled over for that year. Other requirements include:

• The 529 account must have been open for a minimum of 15 years before any rollover can occur.
• Any contributions made to the account within the last five years, along with their associated earnings, are ineligible.
• The amount rolled over annually is capped by the Roth IRA contribution limit for that year.
• There is a lifetime maximum of $35,000 that can be moved from a 529 plan to a Roth IRA for any single beneficiary.

Understanding Non-Qualified Withdrawals

When funds are withdrawn from a 529 plan for any purpose not defined as a qualified expense, the withdrawal is considered non-qualified. This could include purchasing a car or paying for a wedding. The consequences of a non-qualified withdrawal apply only to the earnings portion of the distribution, not the original contributions.

The earnings will be subject to ordinary income tax at the recipient’s marginal tax rate. In addition, a 10% federal tax penalty is levied on those earnings. State tax laws may also impose their own taxes or penalties.