What Are the Allowable Expenses for a College Savings 529 Plan?

When parents or guardians consider setting up a 529 plan to save for college savings, it’s important to know exactly what expenses those funds can and cannot cover. This guide will explore the allowable expenses that a 529 plan can be used for, ensuring that you make the most of your investment.

What Are Qualified Educational Expenses?

Qualified educational expenses for a 529 plan include a range of costs directly related to enrolling and attending an eligible educational institution. These expenses cover:

Tuition fees Textbooks Supplies Equipment required for enrollment or attendance Computer software or services required for special needs

In addition to these, the list of qualified expenses also includes:

Tuition and fees for K-12 schools (with annual limitations) Student loan repayments (with a lifetime?limit of $10,000) Room and board (subject to certain limits)

Room and Board

Room and board, while covered under a 529 plan, have some restrictions:

The amount covered for room and board cannot exceed a specific maximum amount, generally based on the cost of living at the institution. The maximum amount for room and board for a full-time student is generally determined by the financial aid office of each institution.

Other Allowable Expenses

Let's break down some additional allowable expenses for a 529 plan:

Tuition and Fees

These expenses can cover the full amount of tuition and required fees. However, for K-12 tuition, the amount is limited to $10,000 per beneficiary per year.

Books and Supplies

These are for college expenses only. K-12 school books are not covered under a 529 plan.

Computers and Internet Access

These are also limited to college expenses only. A computer and necessary software for coursework are covered, but costs associated with personal use are not.

Room and Board

Again, room and board must comply with certain limits and are only covered if the student is enrolled at least half-time.

Special Needs Equipment

Special needs equipment required for education purposes is covered under a 529 plan.

Transportation and Travel Costs

Costs associated with transportation to and from campus, such as airfare or gas, are not considered qualified education expenses and cannot be covered by a 529 plan.

Health Insurance

Health insurance, including policies offered by the educational institution, are not considered qualified education expenses.

College Application and Testing Fees

These fees are not covered by a 529 plan.

Extracurricular Activity Fees

Costs related to extracurricular activities are also not covered by a 529 plan.

Student Loans

Payments on student loans are considered allowable expenses for a 529 plan, with a lifetime limit of $10,000 per beneficiary.

Penalties and Taxes for Non-Qualified Withdrawals

While a 529 plan allows for withdrawal of funds for any reason, it’s important to note that non-qualified withdrawals may be subject to federal income tax and a 10% penalty on earnings. This means that if you withdraw funds for expenses that are not listed as qualified educational expenses, you may face additional costs.

To summarize, a 529 plan is a powerful tool for saving for college, but it’s crucial to understand the allowable expenses and avoid any non-qualified withdrawals to ensure the best possible tax and financial benefits.