Can 529 funds be used for gap-year expenses?
I recently had a parent ask me if their child’s 529 college savings account money could be used to help pay for gap-year expenses. Here’s the short answer: Maybe.
If you’re hoping to use your child’s 529 account to pay for travel, extracurricular activities, insurance or medical expenses, the answer is no. If you’re hoping to pay for tuition and fees, books and other qualified educational expenses, then the answer is maybe. Let’s take a closer look at this relatively new option for high school graduates and how a 529 account might play a role.
What is a gap year?
First, a little background. A gap year is just what it sounds like: High school graduates wait a year before starting college. Thanks to some well-known students taking gap years (both Prince William and Prince Harry took gap years, as did Malia Obama, who deferred her Harvard enrollment), this previously unheard-of practice is now commonplace.
The American Gap Association1 estimates that 30,000 to 40,000 US students caught the gap bug last year. Why? Reasons vary, but they can include taking a year off either to recover from academic fatigue or to “try out” a possible career path through an internship or other opportunity. Some students seek to boost their résumé with travel or volunteer experiences to increase their chances of getting into a competitive university. Whatever the reason, a gap year typically adds an extra year of expenses, which leads to many parents wondering if a 529 account can help fund gap-year activities.
Gap expenses and 529s: two important concepts to understand
The two concepts to keep in mind regarding 529 account distributions are qualified, as in qualified education expenses, and eligible, as in eligible educational institutions. Let’s look more closely at both of these.
1. Qualified education expenses. Are the expenses being incurred by your child qualified educational expenses as defined by IRS Publication 970? 1 The list is short and includes such items as:
- Tuition and fees
- Books, supplies and equipment
- Expenses for “special needs” services directly related to enrollment/attendance
- Room and board incurred by students who are attending at least half-time
- Computers, peripherals, software, internet access and related services during enrollment/attendance
2. Eligible educational institution: The IRS states that qualified expenses must be must be related to enrollment or attendance at an eligible educational institution, which IRS Publication 9701 defines as:
… Any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education. It includes virtually all accredited public, nonprofit and proprietary (privately owned profit-making) postsecondary institutions.
The IRS has conveniently compiled this list,1 but don’t assume it’s static — it can change frequently.
There are also programs like Outward Bound1 that are being offered through a partnership with an eligible educational institution, which may create an opportunity to use 529 funds for qualified expenses for some nontraditional activities. Just be sure to check with the university affiliated with that or similar programs to ensure the eligibility status is current before your child enrolls.
Before you start: Consult the experts
There are some caveats to be aware of if you and your child decide a gap year is the right move, so before you make decisions, it’s a good idea to:
- Talk to your student’s high school academic counselors — they have experience and insights parents don’t — and talk to the academic counselor at the college your child ultimately plans to attend to ensure the gap-year program you select is aligned with the school’s policies.
- Check with your financial advisor on two fronts:
- To be sure your particular 529 plan doesn’t have more restrictive rules pertaining to gap-year expenses
- To determine whether you need to adjust your contribution schedule so that the account is sufficient to support a gap year plus four years of school
Of course, whether gap-year expenses are reimbursable by a 529 account is only one consideration in the decision to defer college enrollment. Above all, parents are trying to give their kids a great start on adult life — and sometimes, that start begins with a gap.
1 This link takes you to a site not affiliated with Invesco. This site is for informational purposes only. Invesco does not guarantee or take any responsibility for the content.
Thomas Rowley
Director, Retirement and Education Strategies
Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at invesco.com/us in addition to his speaking engagements.
Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.
Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.
Mr. Rowley has been director of retirement business strategy since 2010. Prior to joining Invesco in 2010, he was in charge of individual retirement plan products and Retirement Marketing at Van Kampen.
Prior to joining Van Kampen in 1996, he was a 401(k) regional sales director with an investment firm. His experience also includes seven years in retirement plan operations and three years as head of a brokerage firm’s retirement help desk. He began his career in the Treasury bond futures pit at the Chicago Board of Trade.
Important information
Blog header image: Media Bakery/BLD0188998
Invesco Distributors, Inc. is not affiliated with American Gap Association or Outward Bound.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
All data provided by Invesco unless otherwise noted.
Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.
©2017 Invesco Ltd. All rights reserved.
Factoring a gap year into college savings by Invesco
