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529 Qualified Expenses: More Than Just Tuition

 

Most likely, by this time of year, your child has selected a college or university to attend in the fall, which means that soon it will be time to start paying the bills. If you have a 529 savings plan, you have an advantage: you may withdraw contributions tax-free to pay for “qualified education expenses.” Qualified expenses include not only tuition and fees, but also room and board, books and supplies, computers and software, as well as other materials directly related to school.

Tuition & Fees

Times have changed, and so has the cost of tuition and fees at 4-year colleges and universities. According to US News & World Report, in the past 20 years, the cost of college tuition and fees at a private university has risen by 144%; in-state tuition and fees at a public university have jumped by 212%. No wonder parents flinch when they receive that first bill; but, if you have been contributing regularly to a 529 savings plan, you are ready to go. The tuition and fees required to attend a college or university are considered qualified expenses, so you may withdraw funds tax-free on both the state and federal levels. This includes online classes as well. You may withdraw funds at any time from your plan to cover up to the full amount of tuition and fees.

Room & Board

Living expenses are the second largest expenditure for college, after tuition and fees. The average cost of room and board at 4-year institutions ranges from approximately $10,000 to $12,000. Students may live on-campus or off-campus; however, if your student decides to live off-campus (as 87% of students do), your withdrawal is limited to what you would pay for your student to live on-campus. Any amount above that is considered a non-qualified expense. But, rent in the summer is covered, and so is study abroad – as long as the program is approved for credit by the institution. Note that for all these expenses to be deemed qualified, your student must be currently enrolled at least half-time and working towards a degree.

Books & Supplies

According to the College Board, during the 2019-2020 academic year, the average cost of books and supplies was $1,240 for on-campus undergraduate students at a 4-year university. Books and supplies include textbooks, lab materials, safety equipment, and notebooks – anything that is mandatory for student courses. These too are considered qualified expenses, and money required to pay for all of these materials can be withdrawn from your 529 savings plan without tax and without penalty.

Computers & Internet

Computers and internet access are also considered qualified expenses as is “peripheral equipment.” This includes mouses, speakers, and software required for college courses. They must be used by the beneficiary primarily during their enrollment years. Software for entertainment or amusement is not covered – same for other electronics and smart phones. If your student purchases such items, they will not be considered qualified and will be fully taxed.

Exceptions

Not everything related to college is a qualified expense, including:

  • Transportation and travel costs
  • Application and testing fees
  • Sports expenses & health club dues
  • Extracurricular activities
  • Health insurance (unless it is charged as part of the tuition fee)

Because they are not qualified, they will be treated like ordinary income: state and federal taxes will apply, with a 10% federal penalty for withdrawals from your 529 plan used to pay for them.

New Mexico

If you are a New Mexico taxpayer, New Mexico and the federal government currently have different definitions for “qualified higher education expenses” for tax purposes. It is best to be aware of these differences before withdrawals, so you are not taxed unknowingly. The federal government considers the following as qualified expenses and allows for tax-free withdrawals, whereas New Mexico does not:


  • Up to $10,000 per year for K-12 tuition

  • Transfers up to $15,000 per year to an ABLE account for the beneficiary

  • Apprenticeship expenses

  • Student loan repayment of up to $10,000 each for the beneficiary or any siblings


New Mexico does allow tax-free withdrawals from 529 plans for expenses for students with special needs or disabilities, such as assistance required to be enrolled or participate in a course.

Peace of Mind

So, now you know: qualified education expenses include much more than tuition. Withdrawals from your 529 savings plan can be used tax-free for books, computers, room and board, study abroad, and much more. Clearly, there are many ways to spend your 529 funds; and, in order to achieve the best outcomes for your student and your family, you get to decide how and when to use them.

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For more information about The Education Plan, call 1.877.337.5268 or view the Plan Description and Participation Agreement, which includes investment objectives, risks, charges, expenses, and other important information; read and consider it carefully before investing.

Please Note: Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program. You also should consult a financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plan’s features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

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