529 Qualified Expenses: A Complete List
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Summary:
The 529 investment plan covers qualified expenses for higher education and even K-12 programs. When using the plan to cover these expenses, account holders receive certain tax advantages for withdrawing funds that pay for books, tuition, and even food costs of higher education. These advantages apply to both federal income tax and state tax. Most commonly, account holders use a 529 for higher education but can include K-12 tuition as well as expenses for training and vocational schools.
Most parents worry about paying for their children’s education. It’s understandable considering the current expense of getting a higher education, even if you take advantage of all federal financial aid. In addition to this aid, it’s important to consider the tax advantages of a 529 investment account. The 529 investment account lets your invested money grow and be withdrawn tax-free with no capital gains and income taxes as long as you use the money for educational purposes.
In some cases, this money can apply to K-12 as well as different vocational schools or apprenticeship schools, though these funds are primarily for a college or higher education program. However, “education expenses” is a broad term encompassing many different aspects. Therefore, it’s important to know what exactly qualifies as a “qualified educational expense.” So what exactly qualifies as an educational expense under government rules?
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529 qualified educational expenses
When you contribute money to a 529, your investment grows tax-free within the account. As long as you spend this money on qualified expenses, this money will continue to be tax-free after it’s withdrawn, similar to a Roth IRA. However, not all purchases are 529 qualified educational expenses.
The government only lets you withdraw and use the funds if they are considered education expenses for eligible schools. Typically these are all the standard costs one associate with education, such as tuition and books. These can also be used for tangential items related to education, such as computers and tutoring.
The K-12 and higher education requirements are very similar. However, the K-12 qualifications are a bit more limited in the amount you can contribute than the college investment accounts.
| Expense | College, Trade & Graduate Schools | K-12 |
|---|---|---|
| Tuition | Full. There is no limit to contributions towards tuition from a 529. | Up to $10,000 |
| Rent and Lodging | Yes, applicable to all rent and lodging in a college or higher education environment. The beneficiary must be enrolled half the time. | No |
| Books and School Supplies | All books and school supplies in university or college constitute a qualified expense. | No |
| Transportation | No | No |
| Computers and Tech | Yes, all computer and educational tech-related expenses are considered qualified under college rules. A computer can be purchased for education purposes for K-12 | No |
| Medical Insurance | No | No |
| Intermural/Afterschool Sports or Programs | No | No |
| Special Needs Items | Yes, special needs items are eligible expenses for college. | No |
| Student Loans | Yes, loans are covered with a lifetime cap of $10,000 | N/A |
| Tutoring | Yes | No |
| Business Purchases | Yes, some business purchases can be used by the student if it is related to their college degree before they leave. | No |
College tuition and fees
All tuition related to college and relative fees associated with tuition are considered qualified expenses to pay with the 529 plan. They consider this to be part of what constitutes qualified higher education expenses. If the tuition at your university or college is $45,000 per year, then the entire $45,000 will constitute a qualified expense.
Graduate school
Fortunately, graduate schools are also eligible institutions and programs. This means a graduate student’s tuition and fees can also be covered by the 529 plan funds.
Vocational training schools tuition and fees
Sometimes people want to forgo a four-year university degree and stick with a vocational training program, such as plumbing or computer engineering. A vocational course’s full tuition and fees will qualify under the programs.
K-12 tuition expenses and tuition-related fees
A 529 plan will cover all tuition-related expenses for K-12. However, it does not cover much other than the tuition. It can cover the tuition of any public, private, or religious elementary or high school.
Unfortunately, this is the extent of what a 529 plan covers regarding K-12 education.
Books and supplies
You can still get the tax advantages from a 529 account if you use it for basic college expenses like books, pens or pencils, and even paper. This money can also help pay for more expensive supplies, such as lab equipment, as long as the equipment is required for the class.
This extends to books and supplies for vocational schools as well. It does not, however, cover books and supplies for K-12.
Room and lodging
A 529 plan covers all of the room, lodging, and housing costs for both vocational and college. It does not cover K-12. Sometimes this can be listed as room and board costs when submitting the application for a 529 withdrawal.
Students living both off-campus and on-campus are eligible to withdraw their 529 qualified expenses for this purpose. However, these costs cannot exceed the room and board expenses listed on your school’s estimated cost of attendance.
Pro Tip
Provided the class is necessary for the student’s education, the 529 plan may also cover room and lodging expenses for students studying abroad.
Student loans
Student loans are only applicable to trade school and college students. 529 can be used for student loans, in this case with a lifetime cap of $10,000. If you owe more than $10,000 in student loans, you must find another way to pay off your student loans.
Food
529 can cover the cost of sustenance for both trade schools as well as college degrees. This can sometimes be put under the room and board categories. Whether you eat in the dormitories or buy groceries for your off-campus room, food is considered a qualified higher education expense.
Computers and computer software
A 529 account can be used to cover computers and software-related expenses if it’s related to education and training.
For instance, an architectural student can buy both a computer and the CAD design program with their 529 qualified expenses. Internet expenses qualify as eligible as well.
Special needs
If the student has special needs or certain circumstances that require assistance, the 529 account can cover equipment related to this. This includes transportation costs, which are typically considered a non-qualified expense for most students.
For instance, the funds can pay for speech recognition software or a dictation machine to help a special needs student take notes.
Business purchases
If a student is still in university and wants to start a business, they can use their 529 to purchase the equipment. For instance, if an architectural student wants to start a small architectural firm, they can pay for some of the initial supplies using 529 funds. This is because their degree is in architecture and thus part of their overall educational experience.
Pro Tip
The business purchase is a great way to buy material applicable to your industry, claiming it as part of starting a business related to your educational expertise. Even if the business ends up failing, you can sleep well at night knowing that the equipment you purchased can be used again in your industry, and you got a great deal on it with the tax advantages.
What isn’t covered by the 529 plan?
Even though the 529 qualified expenses cover a great deal of educational costs, not all expenses qualify for payment through these tax-free funds.
- Health insurance. Unfortunately, 529 qualified expenses do not list health insurance as a legitimate expense. For those that attend college, typically a university campus will have an insurance program that can be used. However, this is not considered an eligible expense.
- Transportation costs. 529 does not let you withdraw money to assist with transportation costs. Even if the transportation is strictly for school, this is not an option.
IMPORTANT! As mentioned previously, this is not the case for any special needs students who require additional transportation to access the eligible educational institution.
And what about homeschooling?
Homeschooling has recently become a more popular educational route for many families across the U.S. This has led to many parents choosing a homeschooling option, whether based on religious values or general belief in the homeschooling model.
In 2017, you might have heard that the 529 plan K-12 structure would be applied to homeschools as well. This didn’t end up happening because of various political and community interests.
However, there are certain states that consider homeschooling to be a form of private schooling. This is important because part of the tax deduction and advantages one receives from 529 are at the state level. Alaska, California, Illinois, Indiana, Kansas, Kentucky, Nebraska, and Texas are states that consider home school to be a form of private schooling.
Thus, if you want to have your children in home school and get the benefits of 529 tax treatment with state deductions, you might want to consider moving to one of the states.
Alternatives to 529 plan
Though a 529 account can help pay for several educational expenses, it’s not your only opportunity to get a tax break for these costs.
American Opportunity Tax Credit (AOTC)
Also known as the Lifetime Learning Tax Credit, the AOTC offers additional tax breaks for families that meet the income limit. This includes a tax break on 100% of the first $2,000 used to pay for educational costs.
Depending on your individual situation, you may be able to pay for your higher education using both the AOTC and a 529 plan.
Coverdell account
A Coverdell account is similar to a 529 in that it is used to pay for education via the rules in what is considered a qualified expense. However, Coverdell accounts offer more options for tax deduction than 529 plans, which focus more on higher education.
In many cases, some people will opt for both types of accounts when saving for college. That being said, it’s important to keep the following differences in mind.
- Tax deductions. A Coverdell account can be used for all K-12 institutions in all states, with tax deductions applicable in every state. A 529 account, on the other hand, is only state tax-deductible in certain states.
- Contribution limit. 529 plans have a contribution of $16,000 per annum for qualified education expenses, and Coverdell accounts have a much smaller contribution threshold. Currently, that stands at around $2,000 per annum.
- Expenses. A 529 account only considers K-12 tuition as a qualified expense. However, a Coverdell account can pay for other expenses related to K-12 education. This can include things such as purchasing a computer or hiring a tutor for the child.
FAQs
How long can you leave money in a 529 plan?
You can leave money in a 529 plan indefinitely. However, when you do decide to take it out, it must be used for qualified expenses under the mantel of education.
What happens if you use a 529 plan for non-qualified expenses?
If you use a 529 plan for non-qualified expenses, you are then subject to all of the tax that would be required under a regular investment growth and withdrawal.
How do you withdraw your 529 plan funds?
Parents, guardians, or others can withdraw plan funds by applying online to withdraw the funds through an application. If proceeding online isn’t an option, you can also call your plan administrator and request a withdrawal.
Key Takeaways
- 529 is an investment plan or account that offers tax advantages for educational costs as long as they are qualified expenses.
- In K-12, a 529 plan can only be used for tuition.
- In college and a vocational or training program, a 529 can be used for a variety of different expenses, including tuition, lodging, books, and computers.
- On a national level, 529 does not apply to homeschooling for K-12. However, a number of states consider homeschooling to be private schooling. Thus, they allow state tax deductions similar to what you would get with a typical private school 529 plan.
- 529 is different than a Coverdell plan due to the contribution amount and the different qualifications.
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