What Can You Buy With 529 Distributions?

The biggest challenge for students and parents when planning for education are the financial costs; adjusted for inflation, both public and private four-year college tuitions have more than tripled from 1970 to 2020.  Many savings vehicles exist to defray costs and help parents save for higher education expenses, one of the most popular being a 529 account. 

Section 529 of the IRS Tax Code authorized this tax advantaged savings plan to help with the costs of education. The 529 distributions are subject to guidelines for financial aid eligibility and state and learning institution limitations. Distributions are not taxed at the federal level, but there are rules regarding what counts as a qualifying expense. Spending a 529 withdrawal on a non-qualified expense can result in a 10% penalty. Withdrawals also must occur in the same calendar year as the expenses are incurred as to avoid penalization. 

Recent legislation has expanded the list of qualifying expenses, as well as allowed 529 funds to be rolled into other accounts. 

529 Qualified Expenses

Direct Educational Expenses 

1. College or graduate tuition and fees. Post-secondary (after high school) students are eligible to participate in the federal student aid program administered by the U.S Department of Education and qualify for use of 529 funds.
2. Vocational and trade school tuition and fees. Culinary students can draw from the 529 account to pay expenses related to culinary institute courses. The institution must participate in the U.S Department of Education for federal student aid program.
3. K-12 schools, public, private, and religious institutions can now use 529 plan distributions up to $10,000 per student for tuition. 

Lifestyles and Supplies

1. Campus housing can be paid through 529 distributions including college room and board fees. Off-campus housing rentals qualify up to the same cost of the room and board on campus.
2. Books and supplies including paper, pens, and textbooks required by the specific course are qualified expenses. Schools set the budget limit for books and supplies. You need to check with the school of attendance for the allowable amount each academic year.
3. Special needs equipment and services qualify for 529 distribution. Students using equipment for mobility (wheelchairs) may be eligible for 529 distribution purchases. Depending on the circumstances, transportation may also apply.

Welcoming Technology

The advent of technology has introduced changes to learning methods and academic practices. Computers and some electronics have been added to the list of qualified education expenses as part of the 529 distributions. They must be required as part of the students' study programs. Students need to check with the school about class or course prerequisites that include computers.

1. Computers must be used primarily by the student during any of the years the student is enrolled at the eligible educational institution to qualify.
2. Software may qualify as a 529 distribution expense. For example, technical engineering or design classes may involve computerized assignments. 
3. Internet services can be paid using 529 funds.

529-to-Roth IRA Rollovers

Beginning in 2024, unused 529 assets can be rolled over into the beneficiary’s Roth IRA without incurring a financial penalty or generating taxable income. Up to $35,000 can be rolled over from the beneficiary’s 529 to an IRA in their lifetime. This can offer extra peace of mind to parents worried about overfunding their child’s 529. The future rarely plays out exactly as we expect, and this can reduce the risk of needing to make unqualified withdrawals to access the funds in the future. With that in mind, it’s probably not a good idea to overfund a 529 on purpose: you need to own the 529 account for at least 15 years before rolling over funds, contributions can’t be rolled over for five years after they were made, the rollover amount can’t exceed the annual Roth contribution limit ($7,000 in 2024), and the beneficiary of the 529 plan must be the owner of the Roth IRA and must have earned income equivalent to the rollover amount.  

Keep in mind, each state and school may have different restrictions on using 529 funds. If you are unsure about any of this, please contact an HCM advisor who will be happy to answer your questions. We can help develop an optimal strategy for 529 withdrawals as part of a comprehensive wealth management plan for you and your family.