529s: You have one, but how do you ensure distributions are taken properly? Parents looking to take advantage of the many benefits of a 529 plan will want to know the full details on which educational expenses qualify for tax-free distribution status -- and which do not.1 In Publication 970, the IRS gives detailed guidance on qualified expenses. Here are a few important points.
- Tuition and fees are, in general, covered in full.
- Room and board, if the student is enrolled at least half time. But such expense must be not more than the greater of (1) the allowance for room and board, as determined by the school, that was included in the cost of attendance; or (2) the actual amount charged if the student is residing in housing owned or operated by the school.
- Food. If you spend a certain amount for a meal plan, that entire amount may be deducted, even if used for coffee or ice cream and not a full meal. Weekend meals can also be included if the dining halls are not open.
- Books and supplies. Any fees associated with purchasing school textbooks are considered qualified, as are required equipment or supplies such as notebooks and writing tools.
- Computers/laptops, but only if required by the school. If required, Internet fees and smartphones may also qualify.
- Special-needs services required by special-needs students that are incurred in connection with enrollment or attendance at school.
What's Not Covered
- Student loans. Interest on or repayment of student loans is not considered a qualified expense by the IRS.
- Insurance, sports or club activity fees, and many other types of fees that may be charged to students but are not required as a condition of enrollment.
- Transportation to and from school.
- Concert tickets or other entertainment costs, unless attendance is requisite to a course or curriculum.
Note that expenses must apply to a qualified institution college, university, or vocational school. Also note that, starting in 2018, you can also use up to $10,000 in a 529 plan to pay for elementary and high school costs (K-12). Keep in mind that taxes and a possible 10% additional federal tax will apply to all distributions that are not considered qualified educational expenses by the IRS, so be sure to check first.
1By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Core content sourced from DST Systems, Inc. Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
This material is provided as a resource for information only. Neither LPL Financial or Athene Wealth Management LLC, their affiliates, nor their representatives provide legal, tax, or accounting advice. You are urged to consult your own legal and tax advisors for advice before implementing any plan.