What Qualified Expenses Can a 529 Plan Pay For?
Maximize your education savings by understanding the expanded uses of a 529 plan. Learn the specific withdrawal rules to cover costs tax-free and avoid penalties.
A 529 plan, named after Section 529 of the Internal Revenue Code, is a tax-advantaged savings account designed for future education costs. Money contributed to a 529 plan can grow over time, and withdrawals for qualified educational purposes are free from federal income tax. These accounts are designed to cover a broad range of expenses associated with learning and other educational opportunities.
Qualified Higher Education Expenses
The most common use for 529 plan funds is to cover qualified expenses at eligible postsecondary institutions, including four-year universities, community colleges, trade schools, and postgraduate programs. The primary expense covered is tuition and any mandatory fees required for enrollment or attendance.
Beyond tuition, 529 funds can be used for books, supplies, and equipment that are required for a student’s courses. Funds can also pay for computers, peripheral equipment like printers, computer software, and internet access, provided these resources are used primarily by the beneficiary during their enrollment.
Room and board also qualify if the student is enrolled at least half-time. The amount that can be withdrawn tax-free for housing and meals is capped. It cannot exceed the allowance for room and board included in the school’s official cost of attendance figures or the actual amount charged if the student lives in housing owned and operated by the institution.
K-12 Tuition Expenses
The use of 529 plans has expanded to include costs for elementary and secondary education. Federal rules permit account holders to withdraw up to $10,000 per beneficiary, per year, to pay for tuition at a public, private, or religious K-12 school. The $10,000 annual limit applies strictly to tuition, and other costs like fees, books, or uniforms are not qualified expenses under this rule.
This $10,000 limit is aggregated on a per-beneficiary basis, even if the funds are drawn from multiple 529 accounts. While these withdrawals are free from federal income tax, state tax treatment can differ. Account owners should verify their state’s rules, as some may impose state income tax on withdrawals used for K-12 tuition.
Apprenticeship Program Costs
529 plans can be used to pay for expenses related to certain apprenticeship programs. For a program to be eligible, it must be registered and certified with the Secretary of Labor under the National Apprenticeship Act.
Qualified withdrawals can cover fees, books, supplies, and equipment necessary for participation in the program. These withdrawals for certified apprenticeships receive the same favorable federal tax treatment as those for higher education, meaning the earnings portion is not subject to federal income tax.
Student Loan Repayments
A significant feature of 529 plans is the ability to use funds to pay down student loan debt. A lifetime limit of $10,000 can be withdrawn tax-free to make payments on qualified education loans, applying to either principal or interest.
The benefit extends beyond the account’s designated beneficiary. An additional $10,000 can be withdrawn from the account to repay the qualified student loans of each of the beneficiary’s siblings. These withdrawals are considered qualified distributions and are not subject to federal income tax or penalties on the earnings.
Roth IRA Rollovers
A feature introduced by the SECURE 2.0 Act of 2022 allows for tax-free rollovers from a 529 plan to a Roth IRA for the beneficiary. This transaction is subject to several strict conditions. The 529 account must have been open for at least 15 years for the same beneficiary. Additionally, any contributions made to the plan within the last five years, and the earnings on those contributions, are ineligible for the rollover.
There are also monetary limits on these rollovers. The total amount that can be moved during a beneficiary’s lifetime is capped at $35,000. The amount rolled over in any given year cannot exceed the annual Roth IRA contribution limit for that year. For example, if the annual IRA contribution limit is $7,000, no more than that amount can be rolled over from the 529 in that year.
Understanding Non-Qualified Withdrawals
When funds are withdrawn from a 529 plan for purposes other than qualified expenses, the withdrawal is considered non-qualified. The portion of the withdrawal that represents your contributions is returned tax-free. The earnings portion, however, is subject to both ordinary income tax and a 10% federal tax penalty. Some states may also impose their own taxes or penalties.
Common examples of expenses that are not qualified include:
- Transportation and travel costs to and from campus
- College application and testing fees
- Health insurance premiums
- Fees for extracurricular activities
Student loan payments that exceed the $10,000 lifetime limit are also considered non-qualified. Understanding these boundaries is important for avoiding unexpected taxes.