Not all school-related expenses are eligible for a 529 plan. Here are a few to remember.
- Off-campus accommodation that is more expensive than a dorm: The institution or college establishes a budget for room and board for their students. This is the maximum amount you can take out of a 529 plan each year for housing and food. Anything exceeding the limit cannot come from the 529 plan if the student lives off campus and spends more than the institution estimates.
- Transportation: Getting to and from school can be costly, particularly if the student must fly. During the school year, however, you cannot utilize the 529 plan to cover these expenditures or any commuting charges.
- Cell phone plans: While a 529 plan can be used to purchase some technology, such as computers, it cannot be used to purchase cell phones.
- Insurance: Students must pay for their health insurance with their own money rather than using their 529 funds.
- Student loans: Even if the student borrows money to fund 529 eligible expenses, you cannot use the 529 plan to make payments on student loans.
Is it possible to use 529 on an iPhone?
You might think certain expenses qualify for 529 plan distributions, but you’d be surprised to hear they don’t.
Transportation and Travel If your child is going away to school, you will undoubtedly have to pay for transportation and travel. You’ll have to relocate them in, and you’ll probably have to fly them home for holidays and vacations. Visas and other travel expenses are also not eligible if you’re using a 529 plan for an overseas school or study abroad. As a result, you won’t be able to use your tax-free 529 plan funds for them.
Cell Phone Plans and General Electronics Cell phones have become an integral component of daily life. As a result, they aren’t regarded an educational expense, and while they are “essential,” they can’t be deducted and paid for with your 529 plan’s eligible dividends.
Memberships in sports and fitness clubs – Many colleges provide access to sports and fitness clubs for its students for a nominal monthly fee. Even if the college or institution pays for it, it isn’t considered an educational expense. You can’t use your qualifying 529 plan money to pay for it because it isn’t an educational expense.
Insurance – Health insurance is essential for college students, and many people choose to use a plan given by the college or university if they don’t stay on their parents’ plan. Many colleges and universities provide health services and insurance on campus, which is beneficial. However, just because the item is billed by the institution doesn’t mean it’s related to education, and you can’t use your 529 plan money for it without incurring a penalty.
What costs can a 529 account be used for?
- 529 plans cover qualified expenses. College expenses can be paid with a tax-advantaged 529 college savings plan, but not all expenses are eligible.
Is it possible to use money from a 529 plan for other purposes?
There are numerous options for children to continue their education after high school, and a 529 plan can assist them. A 529 plan’s assets can be used at any accredited higher education institution. This covers not only four-year colleges and universities, but also two-year associate degree programs, trade schools, and vocational institutions, both domestically and internationally. This implies that if your child decides to pursue post-secondary education in their chosen fieldwhether as a computer expert or a cosmetologist, an artist or an electricianyou may be able to pay for it with your 529 assets.
What Can’t a 529 Plan Be Used For?
Tuition, fees, books, and supplies are all included in these costs. Computers, internet connectivity, and computer software are all included in QEE. For students who are pursuing a degree at least half-time, room and board is also a QEE (limited to the allowance for on-campus accommodations). A special needs student’s additional fees are also permitted. For more information, see IRS Publication 970.
- Insurance, sports or club activity fees, and a variety of additional costs that your kids may be charged but aren’t required as a condition of enrolling
- Extra room and board not included in the school’s “cost of attendance” calculations for federal financial assistance purposes
Tip: If your student is living off campus, inquire about the room and board allowance for students living at home with their parents or in other off-campus housing. You can mention the amount the school charges if the student lives in school-owned dorms.
Use education tax credits first
Another blunder to avoid is withdrawing money from a 529 plan for educational expenses while also claiming education tax credits. The restriction is that you can’t utilize the school expenditures you declare for the American Opportunity tax credit (up to $2,500) or the Lifetime Learning credit (up to $2,000) to take tax-free withdrawals from a 529 plan.
Is it necessary for me to keep receipts for 529 expenses?
You don’t have to provide evidence to the 529 plan that you’ll be using the funds for eligible expenses, but you should keep the receipts, canceled checks, and other paperwork in your tax records (for more information, see When to Toss Tax Records), in case the IRS asks for proof that the funds were used for qualified expenses later. Tuition, mandatory books and fees, and even a computer and accompanying software are all eligible for tax-free withdrawals. As long as your son is enrolled at least half-time, you can take tax-free withdrawals for room and board (whether in an on-campus dorm or off-campus accommodation).
You can pay your bills and then claim reimbursement from your 529 account. The plan may mail you a check or deposit funds into your bank account directly. If account owners submit their bank account details, Vanguard, for example, will disburse funds to them by electronic bank transfer. Alternatively, the plan may send a check to the school. “A check can be sent to the account holder, the student, or the school. “We can’t send money to a third party like a landlord or an apartment complex,” explains Char Gross, principal and head of Vanguard’s Education Savings Group. But, she cautions, don’t leave it too long before withdrawing the funds. “Owners of accounts must compensate themselves in the calendar year in which the expenses were spent.”
Is it possible to buy a computer using 529 funds?
Previously, you could only use money from a 529 plan to buy a computer if the college required it for enrollment. That isn’t the case now. As an eligible higher-education expense, savings can be utilized to purchase a computer or pay for internet access.
What costs of higher education are regarded qualified?
A qualified higher education expense (QHEE) is money spent on things like tuition, books, fees, and supplies while attending a college, university, or other post-secondary institution. A student, spouse, parent(s), or another party, such as a friend or relative, can cover these costs. Individuals can receive tax benefits for eligible higher education costs from the Internal Revenue Service (IRS).
Is it possible to use a 529 plan to make a down payment on a home?
Room and board expenses must be incurred by the recipient while attending the institution to be deemed a qualified higher education expense, according to 26 USC 529(e)(3)(B) (i). The student, not the parent, is the main beneficiary. It is not a qualified higher education expense because the mortgage was taken out by the parent, not the student.
Even if the student buys the house, the money from the 529 plan cannot be used to pay the mortgage. A mortgage payment is a loan payment, not a payment for housing expenses. As a result, it isn’t a tax-deductible higher education expense.
Even if you could, making mortgage payments using a tax-free 529 plan distribution would prevent the taxpayer from claiming the home mortgage interest deduction. Taxpayers cannot claim two tax credits for the same expense due to IRS coordination limits.
If a student owns a home, it may impair his or her ability to receive need-based financial aid. The parent’s major place of residence and an independent student’s principal place of residence are both exempt from assets on the Free Application for Federal Student Aid (FAFSA), but there is no such exclusion for a dependent student.