One of the more common questions we get at Financial Plans & Strategies is, “Does this distribution qualify?” 529 Plans, also known as Qualified Tuition Programs (QTPs), allow parents to prepay or make account contributions for college education expenses. There is no limit to how much you can contribute and the growth is not taxed upon distribution. However, expenses must be ‘qualified’ (aka deemed necessary) to the enrollment of the student at an eligible education institution to receive these tax benefits. 1 So what items qualify?
Expenses that Qualify
- Tuition &
- Books & supplies 2
- Technology equipment 3
- Room & board 4
- Expenses for special needs services 5
Expenses that Don’t Qualify
- Transportation & travel
- Student loan repayment
- Health Insurance
- Cell phones & cell phone bills
- Sports & fitness club memberships
- Club activity fees
- Room & board in excess of what the school housing would cost
Be careful! If you use 529 Plans for non-qualified expenses you may have to pay federal taxes on the account earnings as well as a 10% penalty.
You can see from the different categories above that qualified expenses are the ones that the government deems necessary. If you do have qualified expenses, remember to keep receipts and records for taxes!
- “For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution. Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.“ https://www.irs.gov/publications/p970/ch08.html#en_US_2016_publink1000178529
- These must be a material that is required for a student’s enrollment or attendance.
- What the IRS has to say on technology & equipment purchases: “The purchase of
computeror peripheral equipment, computer software, or Internet access and related services if it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature).” https://www.irs.gov/publications/p970/ch08.html
- If enrolled half-time or more; otherwise, no. http://www.dummies.com/personal-finance/college-savings/higher-education-expenses-that-qualify-for-529-college-savings-plans/
- This applies only if your student is special needs AND the cost is related to enrollment or attendance at an eligible institution.