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One of the biggest challenges many people face when it comes to education is managing the financial burden. Fortunately, a 529 college savings plan can be a valuable tool. And these plans aren’t just for college anymore—now, they can also be used for K-12 tuition at private and religious schools. In addition, 529 funds can be applied to a wide range of educational institutions, including four-year colleges, two-year colleges, trade schools, graduate programs, and even some international schools.
A 529 plan is a tax-advantaged savings plan designed to help individuals save for education. However, it’s important to remember that state tax treatment of 529 plans varies, and should be carefully considered alongside fees and expenses associated with the specific plan. Whether or not you qualify for a state tax deduction depends on your state of residence, and state tax laws may differ from federal laws. Be aware that earnings on non-qualified distributions are subject to income tax and a 10% federal penalty tax.
What Expenses Can You Cover With a 529 Plan?
To maximize the benefits of your 529 distributions for educational expenses, it’s essential to request the funds within the same calendar year as the expense. If you withdraw funds during a different calendar year than when the expense was incurred, you might face taxes as a non-qualified withdrawal.
Here are some common qualified educational expenses that can be covered by a 529 plan:
- Higher Education: Post-secondary students (after high school) are eligible to use 529 funds for expenses at institutions that participate in the federal student aid program administered by the U.S. Department of Education.
- Vocational or Trade Schools: Students attending vocational or trade schools, such as culinary institutes, can use their 529 accounts to cover related expenses, provided the institution is eligible for federal student aid.
- K-12 Education: You can now use up to $10,000 per student per year from a 529 plan for tuition at K-12 public, private, or religious schools.
Lifestyle and School Supplies
Balancing 529 distributions with a manageable budget for both qualified and non-qualified purchases can be tricky. Here are some tips to keep in mind:
- Housing: Campus housing, including room and board, can be paid for using 529 distributions. Off-campus housing is also eligible, but only up to the cost of on-campus room and board.
- Books and Supplies: Required textbooks, paper, and pens are considered qualified expenses. The school typically sets the budget limit for these items.
- Special Needs and Services: Equipment and services for students with special needs qualify for 529 distributions. This includes mobility aids and potentially other transportation needs, depending on the circumstances.
Embracing Technology
Many people are unaware that computers and certain electronics are also qualified education expenses under a 529 plan. However, these items must be necessary for the student’s studies to qualify.
- Personal Computers: A personal computer qualifies as a 529 expense if it is primarily used by the student while enrolled at an eligible educational institution.
- Software: Software can qualify as a 529 distribution expense, but only if it’s required for a class. For example, engineering or design courses that require specific software may be covered.
- Internet Services: In some cases, internet services can be paid for using 529 funds. Be sure to check with your internet service provider and the specific requirements of your plan.
Final Thoughts
While these tips offer a starting point, it’s crucial to check with the school and consult our team to ensure you’re making the most of your 529 plan. As mentioned earlier, each state and school may have different rules regarding the use of 529 funds.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. 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.
