Confused about 529 plans, how they work, and what expenses qualify for distributions? You are not alone. We help many clients navigate planning and paying for their children and grandchildren’s education expenses. Here are a few answers to commonly asked questions about 529s.
1. What is a 529 Plan?
A 529 Plan, also known as a Qualified Tuition Program from Section 529 of the Internal Revenue Code, is an account used to save for qualified education expenses for elementary, secondary, or higher education.
2. What are the benefits of a 529 Plan?
- 529 plans offer tax-free investment growth on earnings.
- Withdrawals are tax free when used for qualified education expenses.
- Some states offer an additional tax benefit to deduct the contributions made to their state 529 plan.
3. What expenses qualify?
Qualified education expenses are expenses required for the enrollment or attendance of the student at an eligible education institution.
- For elementary or secondary school, tuition is the only expense that qualifies and can be no more than $10,000 per year.
- For higher education qualified expenses are
- Tuition and fees
- Room and board
- Textbooks, supplies, and equipment
- Computer and peripheral equipment (like a printer)
- With the passage of the SECURE Act by Congress in 2019, qualified education expenses have been expanded to include student loan payments and costs associated with approved apprenticeship programs. A lifetime limit of $10,000 can be withdrawn from the 529 plan and used to repay the student’s student loans plus an additional $10,000 may be used to repay a sibling’s student loans.
4. What expenses do not qualify?
Expenses that are not required for enrollment or attendance at the eligible education institution are non-qualified expenses:
- Transportation and travel costs
- College application and testing fees
- Extracurricular activity fees
- Parking fees
5. What happens if a distribution is taken for non-qualified expenses?
The earnings portion of the distribution will incur income tax and a 10% penalty. You will never be taxed or penalized on the portion of the distribution that is from your contributions.
6. What if my child receives a scholarship?
This is an exception to the penalty rule above. If the scholarship is tax-free, the IRS will allow you to take a distribution up to the amount of the scholarship penalty free, but the earnings portion of the distribution will incur income tax.
7. Can I transfer funds from one 529 account to another?
Yes, funds can be rolled over or transferred from one 529 account to another 529 account if the beneficiary of the other 529 is a member of the original beneficiary’s family. For 529 purposes, family members of the original beneficiary include the original beneficiary’s sibling, parent, child, or first cousin.