529 Qualified Expenses: What You Can Use a 529 Plan For
With tuition and other college expenses skyrocketing, using tax-advantaged investment accounts like a 529 college savings plan can be an excellent way to pay for your degree. According to Sallie Mae’s How America Pays for College 2022 report, about one-third of families used a college savings fund or 529 plan to pay for some of their college costs.
However, 529 plans can only be used for qualified education expenses. If you use the money for noneligible expenses, such as travel during spring break or a gaming laptop, you could incur income taxes and penalties on the withdrawals. Learn about 529 qualified expenses to avoid those penalties.
|529 qualified expenses||Non-qualified expenses|
|Tuition and fees||Travel|
|Room and board||Transportation|
|Textbooks||Phones or tablets|
|Computer for classwork||Fraternity, sorority or club fees|
|Software for classwork||Supplies or equipment for hobbies|
|K-12 tuition||Health insurance|
|Apprenticeship expenses||Clothing (unless a uniform is required)|
|Student loan repayment|
List of qualified 529 expenses
With a 529 college savings plan, your contributions to the account grow tax-deferred. When you withdraw money, the withdrawals are tax-free as long as the money is used for qualified education expenses. If the funds are used for something other than 529 eligible expenses, you have to pay income tax and a 10% penalty.
Qualified expenses for 529 withdrawals include the following:
Tuition and fees
During the 2022-2023 school year, the average cost of tuition and fees at a private college was $39,400 per year. If you went to a four-year public college in-state, the average cost was $10,940 per year.
Luckily, you can withdraw money from your 529 to cover the cost of tuition for the duration of your education.
Room and board
Whether you live in the college dorms or in an apartment off campus, the cost of room and board can be significant. The average yearly cost of room and board at four-year public colleges was $12,310 and $14,030 at private universities.
Room and board is a qualified expense, but the amount you take from your 529 cannot exceed the cost of university-provided housing or the school’s allowance for room and board in its total cost of attendance.
For instance, a dorm room would be a qualified expense, but a luxury apartment with extra amenities would probably exceed the school’s allotment for room and board, so it wouldn’t be an eligible expense.
Students at four-year colleges spent an average of $1,240 in the 2022-2023 school year on school books and supplies. Books required for your classes are qualified expenses, so you can use your 529 funds to pay for them.
Most college students need a computer in order to complete and submit their assignments, so it’s typically a qualified expense for 529 withdrawals. However, the computer must be necessary for classes; a computer or laptop primarily meant for entertainment, such as a gaming computer, does not qualify.
Computer software counts as a qualified expense if it’s required to complete your coursework. Software that is primarily used for entertainment purposes is not a qualified expense.
Although most people think of 529 plans as tools for college, these accounts can have other uses. Families can use up to $10,000 per year per beneficiary for tuition at private or religious elementary or secondary school. K-12 is considered a qualified expense, so your withdrawals aren’t subject to federal income taxes or penalties.
However, not all states consider K-12 tuition to be a qualified expense. For example, in New York, 529 withdrawals used for elementary or secondary school tuition would be subject to state income taxes and penalties. The money would not be subject to federal income taxes and penalties, though.
If you plan on enrolling in an apprenticeship program to learn a trade, you can use 529 funds to pay for the apprenticeship fees, books, supplies and equipment necessary for your participation. For an apprenticeship to be a qualified expense, the program must be registered with the Secretary of Labor under Section 1 of the National Apprenticeship Act.
Under the Setting Every Community Up For Retirement (SECURE) Act, the government expanded the definition of qualified expenses to include student loan repayment. Under this act, borrowers could use up to $10,000 from their 529s to repay student loan debt without having to pay federal income taxes or penalties.
However, not all states have followed this federal guidance and prohibit the use of 529 funds for student loan repayment. For example, Colorado does not consider student loans to be a qualified expense, so if you took out money from a Colorado 529 and used it to pay down your debt, you would have to pay state income tax and applicable penalties.
To find out how your state handles 529 withdrawals, visit your state 529 plan website.
List of expenses your 529 won’t cover
Your 529 dollars can be used for more than just college tuition and textbooks. That being said, there are restrictions on how you can use account withdrawals. The following costs do not count as qualified expenses and would be subject to income taxes and penalties.
Even though you’ll likely need to travel to and from your college, flights and hotel stays are not qualified expenses for 529 plans.
Even if you commute to class on a regular basis, transportation is not a qualified expense, so you would have to pay taxes and penalties on any 529 dollars you used for that purpose.
Phone or tablets
Although computers needed for coursework can be a qualified expense, phones, tablets and other devices are not. These items are labeled as discretionary or optional expenses, so you’ll ideally use your 529 funds for other college costs.
Fraternity, sorority or club fees
Although fraternities, sororities or other clubs may be an integral part of campus life, they’re not essential expenses that you need to pay to graduate. As a result, the fees for these organizations aren’t qualified expenses.
Supplies or equipment for hobbies
Extracurriculars are an important part of the college experience, but supplies, equipment, or other costs related to those activities are not qualified expenses for 529 funds.
Even though your college may require you to have health insurance, it’s not a qualified education expense for 529 withdrawals. The only exception is if the school includes the cost of insurance as part of tuition.
Whether you need new jeans or just want a sturdy backpack to lug your textbooks around campus, you should know that clothing isn’t a qualified expense for 529 withdrawals. The only exception is if your school has a required uniform, or clothing that is paid for as part of your tuition.