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Qualified 529 Expenses

Money in a 529 plan may be used cover a wide range of expenses related to higher education. As we go through this section, we will also delineate between expenses allowed federally, but may not be allowed by some states.

Qualified expenses include tuition and fees related to attendance to the educational institution. It’s important to note what the IRS considers a qualified education institution. A qualified educational institution is generally a college, university, tech school, or other institution that participates in the Department of Education’s student aid program. This include public, private, non-profit and for-profit higher education institutions.

Room and board expenses also qualify, but there are certain conditions. The student must be enrolled at least half-time at the school. Expenses are also limited to the actual cost of the room and board if the student is living in housing operated by the institution, or if living off campus, expenses are limited to the allowance for room and board in the institution’s financial aid calculation for cost of attendance.

Additional expenses include lab fees, activity fees, course books, supplies and equipment that are necessary and paid to the education institution. Computers, laptops, software and programs used by the beneficiary while attending an eligible institution also qualify. However, these expenses are limited to those used in conjunction with attendance at the educational institution. Electronics such as TVs, games, etc. not specifically used for the purposes of attendance at the education institution are not considered qualified expenses.

The Tax Cut and Jobs Act now allows account owners to pay for the costs of public, private, or parochial K-12 education. The Act allows up to $10,000 per year, per beneficiary to be used to pay for these expenses. However, this is at the federal level. Some states such as Illinois currently consider these non-qualified expenses and would tax and penalize the distribution.

The SECURE Act added a few additional expenses that qualify as expenses that may be paid with 529 plan money. Tuition, fees, and related expenses for apprenticeship programs are now qualified expenses under 529 plans. Additionally, account owners may now use up to $10,000 to pay for student debt of the beneficiary, as well as up to $10,000 per sibling for each of the beneficiary’s siblings.

For example, let’s assume that a 529 owner has four children and a total account balance of $50,000. Sibling one has $15,000 in student debt, sibling two $5,000, sibling three $10,000, and sibling four $7,500 respectively. The account owner can put $10,000 to sibling one’s debt, $5,000 to sibling two, $10,000 to sibling three, and $7,500 to sibling four. Thus, the account owner can use $32,500 of plan money to pay the student debt.

Plan owners may either pay the qualified expenses out of pocket, then withdraw the exact funds from the 529 plan, or easier, pay the qualified expenses directly from the 529 plan.ira-or-529

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