The Many Uses for 529 Funds
As we approach the end of College Savings Month, we focus on the allowed and disallowed uses of 529 savings. Many may not know that 529 college savings accounts can be used for things besides tuition at a traditional four-year institution, several other types of education programs qualify. The following are considered qualified institutions of higher education: accredited colleges and universities, trade schools, or vocational programs qualified for Title IV Federal Student Aid, and registered Apprenticeship Programs with the Department of Labor. Some unlikely programs on the qualified lists include cosmetology, culinary schools, and even a golf academy.
Besides tuition, you can also make qualified withdrawals for room and board expenses up to the limits set by the program they attend, even if they live off campus. Additionally, costs for books, supplies, software, and special needs equipment required for class are qualified withdrawals. The IRS also considers certain technology purchases: computers, laptops, printers, and internet service qualified expenses while the student is enrolled full-time at an accredited institution.
Some expenses are not qualified even if required for your student during enrollment. Fees for college applications and required testing are not considered qualified expenses. They also do not allow qualified withdrawals for travel to school, parking, car, or bus transportation. Additionally, you cannot take a qualified withdrawal for fees associated with extracurricular activities, healthcare, or fitness clubs, even if the institution bills for these expenses. Furthermore, general electronics such as cell phones are not considered qualified expenses.
Recent changes to the law have allowed for some unexpected, qualified withdrawals. You can now withdraw up to $10,000 for each student for K-12 private school tuition each year. Students can also make qualified withdrawals to repay up to $10,000 (lifetime limit) of principal on student loans. Finally, the newest addition to this list is to allow up to $35,000 (lifetime limit) to be rolled over to a Roth IRA for the beneficiary as contributions. It is important to note that these types of withdrawals have complex rules and restrictions. Additionally, your state may not consider these withdrawals to be state tax-qualified.
Finally, you may ask yourself what happens if my beneficiary doesn’t need or qualify to use my 529 college savings account. The first option is to change the beneficiary to another first-degree relative: a sibling, niece or nephew, or grandchild attending or planning to attend a qualified institution. The second option is to use one or more of the newer qualified withdrawal strategies mentioned above. Finally, there are circumstances in which the federal government waives the 10% tax penalty for nonqualified withdrawals. Your family may fit one or more of these categories: death of the beneficiary, disability of the beneficiary, beneficiary receiving a tax-free scholarship, beneficiary receiving educational assistance through a qualified employer program, beneficiary attending a U.S. Military Academy, or to reimburse qualified education expenses used to generate the American Opportunity Tax Credit or Lifetime Learning Tax Credit.
It is vital to consult with your financial advisor and tax preparer before making withdrawals. The rules can be complex and extend beyond State or Federal tax law. To better understand what is allowed (or not) reach out to an advisor at Mader Shannon today!