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What Can You Buy With 529 Distributions? Thumbnail

What Can You Buy With 529 Distributions?

The biggest challenge for students and parents when planning for education are the financial costs; including tuition and academic expenses. It’s not just for college anymore – added to the tuition eligibility are K-12, private and religious schools. Funds can be used for four and two year colleges, trade schools, graduate programs and some international institutions.

Section 529 of the IRS Tax Code authorized this tax advantage savings plan to help with the costs of education. 529 distributions are subject to guidelines for financial aid eligibility, state and learning institution limitations. Good news, distributions are not taxed at the federal level, but you do need to understand the rules for qualifying expenses. You are required to report all 529 spending to the IRS – so it’s important to keep good records and separate qualified and nonqualified receipts. 

Here’s a list of 529 qualified educational expenses:

Educational Planning

Education at all levels is important, and planning is essential for achieving this challenge successfully. To take advantage of the 529 distribution, you need to submit your request for the cash during the same calendar year. The IRS only allows reimbursements from a 529 plan in the year the expense was incurred. 

  1. College or graduate tuition and fees. Money saved in a 529 plan can be withdrawn tax-free to pay for qualified education expenses required for attendance at in-state, out-of-state, public and private colleges and universities. This includes tuition, fees, books, supplies and equipment, computers and room and board if the student is enrolled on at least a half-time basis.
  2. Apprenticeship programs. This includes trade schools and vocational programs, as long as the apprenticeship is registered with the federal Department of Labor. These programs typically combine on-the-job training with classroom instruction, often at a community college. Eligible expenses include fees, textbooks, equipment and other supplies required for the apprenticeship.
  3. K-12 schools, public, private, and religious institutions can now use 529 plan distributions up to $10,000 for tuition. This allowance is per student, not per account. If the student is a beneficiary of multiple plans, the distribution is limited to $10,000 per year, and excess distributions are included in gross income. 

Lifestyles and Supplies

Sit down with family members and the future student to create a withdrawal plan that works for the student’s needs, the school’s curriculum and the program’s eligibility. It helps everyone to understand how best to use the 529 distributions while establishing a manageable budget for qualified and nonqualified purchases.

  1. Campus housing can be paid through 529 distributions including college room and board fees. Off-campus housing rentals qualify up the same cost of the room and board on campus
  2. Books and supplies include paper, pens, textbooks required by the specific course are qualified expenses. Schools set the budget limit for books and supplies. Check with the school of attendance for the allowable amount each academic year.
  3. Special needs equipment and services qualify for 529 distribution. Students using equipment for mobility (wheelchairs) may be eligible for 529 distribution purchases. Depending on the circumstances transportation may also apply.

Welcoming Technology

The advent of technology has introduced changes to learning methods and academic practices. Computers and some electronics have been added to the list of qualified education expenses as part of the 529 distributions. They must be required as part of the students' study programs. Students should check with the school about class or course prerequisites that include computers. 

  1. Computers must be used primarily by the student during any of the years the student is enrolled at the eligible educational institution.
  2. Software may qualify as a 529 distribution expense. For example, technical engineering or design classes may involve computerized assignments. 
  3. Internet services can be paid using 529 funds.

Check with the school; there may be specialized expenses as students enter college as a freshman. The same applies as they complete the final years of study, preparing to enter the career world. 

Keep in mind, each state and school may have different restrictions on using 529 funds. If you are unsure about anything, check with your financial advisor or plan provider. They can help develop the best strategy for 529 withdrawals. Withdrawals for other reasons other than education could impose a ten percent penalty.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.