Jul 24

529 Savings Plans: What Qualifies for Tax-Free Distribution?

Whether your child or grandchild is starting college now or in several years, if you are taking advantage of a 529 college savings plan, it’s important to remember which educational expenses qualify for tax-free distribution and which do not.* The IRS gives detailed guidance on qualified expenses in Publication 970. Here are a few important points.
 

What's Covered

• Tuition and fees are covered in full.

• Room and board, if the student is enrolled at least half time. But such expense must be not more than the greater of (1) the allowance for room and board, as determined by the school, that was included in the cost of attendance; or (2) the actual amount charged if the student is residing in housing owned or operated by the school.

• Food. If you spend a certain amount for a meal plan, that entire amount can be deducted, even if used for coffee or ice cream and not a full meal. Weekend meals can also be included if the dining halls are not open.

• Books and supplies. Any fees associated with purchasing school textbooks are qualified, as are required equipment or supplies such as notebooks and writing tools.

• Computers/laptops, but only if required by the school. If required, Internet fees and smartphones may also qualify.

• Services required by special-needs students that are incurred in connection with school attendance.
 

What's Not Covered

• Student loans. The IRS does not consider interest on or repayment of student loans a qualified expense.

• Insurance, sports or club activity fees and many other types of fees that may be charged to students.

• Transportation to and from school.

• Concert tickets or other entertainment costs, unless attendance is requisite to a course or curriculum.

 

Note that these expenses must be related to attendance at a qualified college, university or vocational school for post-secondary education. Also keep in mind that taxes and a possible 10 percent additional federal tax will apply to all distributions that are not considered qualified educational expenses by the IRS, so be sure to check before withdrawing funds.

 

Source/Disclaimer:
*By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.
Required Attribution: Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Recent Articles

Sep 05

How Inflation Affects Retirees

Stay ahead of inflation in retirement

Inflation, a sustained increase in the price of goods and services in an economy over a period of time, averages a little over 3 percent annually.1 For the 12 months ending July 2018, U.S. inflation stood at 2.9 percent.2 As the economy grows, inflation tends to tick upward, and retirees and near-retirees may be especially concerned about how this will affect their finances.