10 Things You Can Buy With 529 Savings Plan Distributions
Expenses that 529s will cover
A tax-advantaged 529 college savings plan can be used to pay for college, but not all expenses qualify. Withdrawals from 529 plans are called distributions, and they must be used toward qualified education expenses -- otherwise they will incur federal income tax and an additional 10 percent penalty. That warning aside, wealth advisors say there are many items that most people don't realize qualify for a 529 distribution. Here are 10 qualified purchases investors can make with 529 funds.
College tuition and fees
Money saved in a 529 plan can be used to pay tuition and fees associated with college or graduate school. Eligible schools include any postsecondary educational institution eligible to participate in the federal student aid program administered by the U.S. Department of Education. Parents and college-bound students can see whether their school qualifies by checking if the institution is listed on the Federal School Code List.
Vocational and trade school tuition and fees
If a student decides to become a chef, for example, funds from a 529 account may be used to pay expenses related to attending a culinary institute, provided the institution participates in the Education Department's federal student aid program. "Funds are not only for four-year schools, but for two-year colleges, trade schools, graduate schools and even some international institutions," says Joshua Houle, vice president and wealth manager at Steward Partners Global Advisory in the District of Columbia.
Elementary or secondary school tuition
Prior to the recent passage of the Tax Cuts and Jobs Act, effective in 2018, 529 distributions could only be used for qualified expenses for postsecondary education. "The TCJA has now expanded the use of 529 plans to distribute up to $10,000 per student to cover tuition incurred at public, private or religious elementary or secondary schools. For states offering a tax deduction for 529 contributions, this is a huge opportunity to funnel tuition payments through the 529 plan to effectively make the tuition payments deductible on a state basis," says Joe Hogan, director of financial planning at Mariaca Wealth Management in Lake Worth, Florida.
Off-campus housing
While investors can use 529 funds to pay for a college's room and board fees, housing arrangements off campus also count. "Off-campus housing and rentals are qualified up to the cost of room and board on campus," Hogan says. For instance, if university-owned housing is $800 per month, then the disbursement for an off-campus rental can't be more than that amount.
Books and supplies
Paper, pens and any textbooks or supplies required by specific classes are qualified expenses. Schools will set the budget limit for books and supplies, so experts recommend checking with the institution on the allowable amount for each academic year.
Computers
While some electronics, such as computers are eligible expenses, these items must be required as part of the student's attendance. Experts recommend trying a web search to determine whether owning a laptop is explicitly listed as a requirement for enrollment. For instance, Virginia's College of William and Mary states on its website: "To best take advantage of our campus-wide network, the college requires all incoming freshmen to own a laptop computer."
Computer software
Some computer software may count as a qualified expense. For instance, if you're studying to be a designer and need design or editing software, funds from a 529 account can cover those purchases, says Joshua Andrews, a certified financial planner at USAA in San Antonio.
Internet services
A 529 distribution can be used to pay for internet service. "Many people do not realize the extent that technology items qualify for distributions," Andrews says.
Special-needs equipment
These include certain services and equipment that a special-needs student may require, such as a wheelchair. Transportation costs, which are generally considered a nonqualified expense, may qualify depending on a student's special needs.
Other expenses
A few creative strategies are also possible with 529 distributions under the guidance of a financial planner, says Joshua Escalante Troesh, founder of Purposeful Strategic Partners, an investment advisory firm in Los Angeles. "If the student wants to start a business shortly after college, a significant amount of the business equipment could be purchased with 529 money if purchased during the final years of college and actually used in the college courses," he says.
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