Susan E. Thomas CPA
What education expenses can 529 plan funds be used for?

Funds in a 529 plan must be used for "qualified education expenses" in order to be tax-free when withdrawn. For a 529 prepaid tuition plan, this means in-state public college tuition only. For 529 savings plans, the definition is much broader.

College and graduate schools: Funds in a 529 college savings plan can be used to pay the full cost of tuition, fees, books, supplies, a computer and, if the student is attending at least half-time, room and board costs for any college or graduate school in the U.S. or abroad that is accredited by the U.S. Department of Education (DOE).

Room and board costs: Room and board costs for students living on-campus are limited to the actual amount charged by the school. Room and board costs for students living off-campus, including students living with their parents, are limited to the amount the school decides is reasonable. Each state's plan should spell out the guidelines that govern room and board expenses.

Part-time college and graduate school students: Funds can be used for tuition, fees, books, and supplies, but not room and board.

Foreign schools: Under federal law, 529 funds can be used at any "eligible educational institution." This definition includes foreign schools, as long as they are approved by the DOE. The DOE maintains a list of approved schools on its website (these are schools that are eligible to receive federal financial aid). If a foreign school appears on this list, it is considered to be an eligible institution under federal rules.

Vocational schools: Funds can be used for some vocational schools. A vocational school, like a college, graduate school, or foreign university, may be considered an "eligible educational institution" if approved by the DOE. Check with the plan administrator to confirm if a particular school is eligible.

K-12 school: Funds in a 529 college savings plan can be used to pay for K-12 tuition, up to $10,000 per year, at any public, private, or religious K-12 school (excludes homeschooling). Only tuition is allowed.

General living expenses: Funds generally can't be used for general living expenses while at college or graduate school, such as personal expenses, transportation, or phone charges. But gray areas do exist. For instance, the grocery expenses of students living off-campus may qualify as board charges (up to the college's board limit for on-campus students), so you should address questions like this to your plan administrator. Remember that the earnings portion of any withdrawal not used for qualified education expenses is subject to federal income tax and a 10% federal penalty, and possibly state taxes too.

Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses - which contain this and other information about the investment options, underlying investments, and investment company - can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified higher-education expenses. For withdrawals not used for qualified higher-education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.

Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011