529 Qualified & Nonqualified Expenses

Paying attention to 529 qualified and nonqualified expenses for plans can help you avoid needlessly paying a penalty.

Presented by Gerard Longo, AIFA®, CPFA®:

What are the qualified and nonqualified expenses?

You’ve put in the hard work of saving for college, and now it’s time to start using those 529 plan assets to help with a family member’s education-related costs. But before you begin withdrawing those funds, it’s important to understand the difference between qualified and nonqualified expenses.

The lists below provide an overview of some of the most common questions about expenses allowed.

Qualified 529 Plan Expenses

Tuition and fees. This is limited to $10,000 per year for K-12 and some foreign institutions do qualify. Requirements include:

College must be accredited and eligible for U.S. Department of Education’s student aid program.
K-12 eligible (eligibility varies by state.
Registered apprenticeship program

Books, supplies, and equipment. Items may be purchased from anywhere (e.g., Amazon) but you should keep evidence of the requirement (e.g., course description).Requirements include:

College courses only
Must be required for the course
Required equipment, including tools for apprenticeship programs

Special needs services. Requirements include:

College courses only
Must show connection to enrollment or attendance

Room and board. Must be enrolled at least half-time (credit hours defined by school). For off-campus housing, contact the school’s financial aid office for applicable cost of attendance amounts.

College courses only
Maximum amount is the greater of either 1) actual charge for residence in school0-operated housing or 2) annual “financial aid cost of attendance” room and board amount for that school

Computers, computer hardware, software, and internet access. Software should be predominately educational in nature.

College courses only
Must be used primarily by the 529 beneficiary and during years of enrollment

Repay student loan debt. Lifetime limit is $10,000 for the plan beneficiary and additional $10,000 per sibling of the plan beneficiary. Interest that is paid with 529 funds will not be eligible for student loan interest deduction.

Principal and interest payments toward qualified education loans of the 529 plan beneficiary or siblings of the plan beneficiary

Nonqualified 529 Plan Expenses

Transportation and travel costs. Even if it is for travel to and from campus during holiday times, no travel costs qualify. This is often a concern for out-of-state students.

Health insurance. This is not qualified, even for a health plan provided by the student’s school.

Extracurricular activity fees. Only tuition costs and fees are qualified, additional activity fees are not.

Student loans. Student loan payments in excess of current qualified expense limits are not qualified.

Application and testing fees. Prepatory fees are not qualified. Your 529 distributions are limited to tuition and fees associated with current enrollment.

Please note: Just because an expense is nonqualified, it doesn’t mean the 529 plan funds cannot be considered a source of payment. The main consequence of paying nonqualified expenses from the 529 plan is that the gains portion of that distribution will be taxed, and it could be assessed a 10 percent penalty.

For more information on 529 plans (referred to as “Qualified Tuition Programs”), and for examples of tax and coordination calculations, see the Qualified Tuition Programs section of IRS Publication 970.

This material on qualified and nonqualified expenses has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

###

Gerard Longo is a financial advisor located at Global Wealth Advisors 2400 Ansys Drive, Suite 102, Canonsburg, PA 15317. He offers advisory services through Commonwealth Financial Network^®, Member FINRA / SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors, LLC are separate and unrelated to Commonwealth. Gerard can be reached at (412) 914-8292 or at info@gwadvisors.net.