529 Plan Withdrawal Rules

Under 529 plan withdrawal rules, the following are considered qualified education expenses:

• Enrollment fees: Includes student activity fees you are required to pay to enroll or attend the school. For example, an activity fee that all students are required to pay to fund all on-campus student organizations and activities.

• Tuition and associated expenses: Tuition, books, fees, equipment and supplies

• Room and board: This is allowable as a qualified expense only if the designated beneficiary of the 529 plan is a student enrolled at least half-time at an accredited and qualified educational institution. The expense for room and board can’t be greater than one of the following two amounts:

• • The allowance for room and board, as determined by the school, and included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student

• • The actual amount charged if the student is residing in housing owned or operated by the school

• Special needs expenses: The student must be a special needs beneficiary and these expenses must be coordinated with the qualified and accredited educational institution.

• Computers, software and internet access: Includes computer peripheral equipment, educational software and internet access and associated costs if the internet is used primarily by the beneficiary. Internet access is qualified if it will be used by the beneficiary during any of the years of education. Software is not qualified unless it is for educational purposes.

• Qualified education loan payments: No more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary’s sibling. A sibling includes a brother, sister, stepbrother or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary. You can’t deduct as interest on a student loan any amount paid from distribution of earnings from a QTP after 2018 to the extent the earnings are treated as tax-free because they were used to pay student loan interest.

• Apprenticeship Programs: Fees, books, supplies and equipment for participation in a registered and certified apprenticeship programs.

• K-12 tuition: Tuition and fees incurred by a designated beneficiary, in connection with enrollment or attendance at an eligible elementary or secondary school. The limit is $10,000 per calendar year.

Expenses that don’t fall under the definition of “qualified” include:

• Transportation and travel expenses: Includes gas, parking, mileage and airfare.

• College testing and entrance exam fees: Includes college admissions application fees, standardized testing fees for ACT/SAT exams, fees for the CLEP and any other testing fees.

• Health insurance premiums: Includes health insurance provided by the school.

• Personal living expenses: This does not include room and board.

• Fees for sports or club activities: Sororities and fraternities are part of this.

Tax penalties to avoid

There are some tax issues you should be aware of when it comes to 529 plan withdrawals as well. These include deductibility and credits, as well as penalties. Here are the tax penalties that will result if you don’t carefully follow 529 plan withdrawal rules:

• When a distribution is made for qualified education expenses, both it and the earnings aren’t subject to taxes. If you take a distribution that is not for qualified education expenses, you could be subject to federal and state taxes on the earnings portion of that distribution at your ordinary income tax rate plus a 10% penalty.

• The distribution is not subject to federal or state taxes. However, the earnings, capital gains and dividends are subject to federal and state taxes.

• If the account is a custodial account, withdrawals can only be to the beneficiary. Otherwise, there will be tax implications.

• Withdrawal earnings will be subject to taxes if they exceed adjusted qualified education expenses.

Bottom line

First, calculate the cost of college or university. Then consider that 529 plans are one of the best ways to fund a college education. Be aware that 529 plan withdrawal rules are numerous and can be confusing. You can inadvertently trigger a tax penalty unless you make sure there’s record of your adjusted qualified education expenses. Keep good records and follow the withdrawal rules when distributing money from a 529 plan.

Tips on saving for education

• If you’re saving money for a college education, you may want the assistance of a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Calculate payments on student loan debt and amortize your loan using SmartAsset’s student loan calculator. You can use these projections to inform your future financial plan.

Photo credit: ©iStock.com/Andrii Dodonov, ©iStock.com/evgenyatamanenko

Rosemary Carlson has nearly three decades of experience teaching finance at the college level, and she has written hundreds of articles about business finance and personal finance.

SmartAdvisor helps qualified financial advisors build meaningful relationships directly with mass-affluent consumers who are actively searching for financial advice. Learn more about how our platform can help grow your practice.

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