In today's ever-evolving landscape of higher education costs and the pursuit of academic excellence, it's crucial to have a robust plan in place to help ease the financial burden. That's where 529 plans come into play, offering a lifeline for many families aspiring to secure a brighter future for their loved ones. These tax-advantaged savings accounts have gained popularity for their ability to grow investments and provide a haven for educational funds. But to make the most of your 529 plan, it's essential to have a clear understanding of what expenses qualify for tax-free withdrawals. In this blog post, we'll explore the world of eligible 529 plan expenses, shedding light on what you can and cannot use your savings for. So, let's dive into the realm of education financing and ensure you're equipped with the knowledge to make the most of your 529 plan.
What 529 Expenses Qualify as Tax-Free Distributions?
- Tuition and fees.
- Room and board. If you are living off campus, the max that can be reimbursed is the school listed room & board estimate.
- Books and supplies.
- Technology items, such as computers, printers, software, and internet access.
- Student loan repayments up to $10,000 per beneficiary. A word of caution: some states reclaim a tax credit or deduction if used for this purpose. For example, Indiana reclaims the 20% state tax credit associated with contributions tied to this distribution.
- $10,000 worth of annual K-12 tuition, though the same word of caution above applies.
I’m not a fan of leveraging your 529 account for K-12 education purposes. You are accessing the monies before they have had a chance for real compound growth. However, if this is a 529 that was passed down through the family and is mostly investment gains, then this belief changes.
What 529 Expenses Are Ineligible for Tax-Free Distributions?
- Transportation, such as travel to and from campus.
- Campus parking.
- Club fees.
- Athletic fees.
- Furnishing of a dorm room.
- Student loan interest (key word – interest).
- Health insurance, even if the policy is offered by the school.
- College application and testing fees.
If there is still money left in a 529 plan after your child goes through school, the funds can be used for another family member. Or (and this is a favorite of mine), it can be used as a legacy gift for future generations. The beneficiary can be changed to your children’s children and be used for their schooling. Be sure to invest it appropriately given their new timelines.
Remember, real financial planning goes well beyond 529 plans. The comprehensive nature of what we do is about much more than just saving for education. It's about crafting a financial strategy that encompasses every aspect of your financial life, from investments to estate planning, taxes, and charitable giving.
If you have any questions on college planning or what may qualify as an eligible expense, please do not hesitate to reach out.