What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?

Opening a 529 plan to save for your child’s college expenses can be a great way to build savings while reaping tax benefits. What Are Qualified Expenses

Some of the benefits of a 529 plan include tax-free growth and tax-free withdrawals if the money is used for “qualified education expenses”. But one thing that stops many would-be 529 owners is understanding what exactly a 529 plan will cover – what exactly are qualified education expenses?

If you’ve been considering opening a 529, here are some common qualified expenses you should be aware of. We also go into depth on some of the non-qualified expenses that people sometimes get mixed up and “think” they do qualify. Make sure you don’t fall into that trap.

Qualified Expenses For A 529 Plan

A 529 plan only covers expenses that are related to education (see below for using a 529 plan for elementary education). However, there are rules. Most qualified expenses cannot exceed the cost estimates made by the school that the 529 beneficiary will be attending. Typically the school’s financial aid office will mail the estimate to students or post it on their website. For example, you can find the estimated cost of attendance for UCLA here.

K-12 education includes any kindergarten through 12th-grade school – public or private – along with some expenses. However, pre-K, montessori, and childcare are NOT eligible. What Are Qualified Expenses

Post-secondary education includes college, university, trade schools, vocational programmes, and registered apprenticeship programmes.

Finally, the state the account owner files taxes in is the state that the 529 plan rules apply. Since each state maintains different rules for qualified expenses, make sure you check with your account owner (typically the parent) state of residence.

Here’s what’s covered:

Tuition – Tuition is a qualified expense for both full and part time students at accredited institutions. To be accredited simply means the college or university has passed standards set by a reviewing committee. While the majority of colleges are accredited, be sure to ask the financial aid office ahead of time. What Are Qualified Expenses

Room and Board – If the student is attending college half-time or more and the room and board are paid directly to the college or university, the cost is a qualified expense.

If room and board are to be paid to a landlord and grocery store, the budget is set by the school and is available to students who are attending half-time or greater. If the rent paid to a landlord is higher than the school’s room and board estimate, the excess is not considered a qualified expense.

For instance, our UCLA estimate suggests that off-campus room and board will cost $18,609. That means that you cannot use more than $18,609 per year from your 529 plan to be “qualified”.

Technology Items – You can use a 529 plan to cover technological needs such as computers, printers, laptops and even internet service. These items must be used by the plan beneficiary while enrolled in college. You can also use this to get software that’s required for school – for example, maybe you need to install Microsoft Word or Adobe Photoshop to get the right tools for class. Make sure you check out your campus bookshop and look for “Education” versions of software – it’s much cheaper! What Are Qualified Expenses

Books and Supplies – Books and supplies are qualified expenses, but only the ones that are required. Also, this budget will be set by the school, but if it’s a required expense of your class, you can always use your 529 money. Beyond textbooks, some common items include lab supplies, scantrons, and even basics like pen and paper.

Student Loan Repayment – Student loan repayment is now a qualified expense on the federal level, but it may not be eligible in your state. You can take out $10,000 per individual as a lifetime limit. See our section below on this new feature. Read our full guide to using a 529 plan for student loan repayment here.

K-12 Expenses – Tuition at a public or private K-12 school is a qualified expense on the federal level up to $20,000 per year, but it may not be eligible in your state. Click on your state on our 529 plan guide and see if your state qualifies. You can also use funds to cover curriculum and course materials, books, instructional materials, tutoring, testing fees for standardised tests, dual enrolment fees, and educational therapies for students with disabilities. What Are Qualified Expenses

Workforce Training And Credential Programs – You can use 529 plans to cover tuition, fees, books, supplies, fees for testing to obtain a credential, fees for continuing education, and equipment required for enrolment in a recognised postsecondary credential programme.

IRA Rollover – You can potentially roll over up to $35,000 into a Roth IRA. However, this is a limited option with a lot of restrictions, and some states won’t comply. Read our full guide here: How To Rollover A 529 Plan To An IRA.

Expenses That You Think Might Qualify, But Don’t

There are also expenses that you might think qualify for 529 plan distributions, but you’d be surprised to learn that they don’t qualify.

Transportation and Travel – If your child is going away to school, you’re going to inevitable deal with transportation and travel expenses. You need to move them in, move them home, and you’re likely going to fly them home for holidays and vacations. Plus, if you’re using a 529 plan for overseas school or study abroad, Visas and other travel are as not qualified. So you can’t use your tax free 529 plan money for these.

General Electronics and Cell Phone Plans – Cell phones are an everyday part of life. As such, they are not considered an education expense, and while “necessary”, they can’t be expensed and paid for with your qualified distributions from your 529 plan.