What expenses can a 529 education savings account cover?
These plans provide flexibility in how you can use the funds you’ve accumulated to help handle education costs.
529 ACCOUNTS HAVE LONG BEEN A POPULAR WAY to set aside funds for education. They allow you to invest money for a beneficiary, and when the student is ready, the assets can be withdrawn free from federal (and potentially state and local) taxes — as long as you use them to pay for “qualified higher education expenses.”1
“Tuition and fees are the biggest college bills you’ll probably face, but there are other eligible expenses,” says Richard J. Polimeni, Education Savings Programs Executive for Bank of America. Those include:
- College costs beyond tuition: Certain room and board, books, supplies and equipment required for enrollment or attendance at an eligible educational institution
- Tech equipment and support: Computers and peripheral equipment, software, internet access and related services that are to be used primarily by the 529 beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school
- Expenses for special-need students: If your beneficiary is a special-needs student, certain other expenses necessary or required for the special-needs student to enroll at or to attend an eligible post-secondary school may also qualify.
What a 529 can cover
As long as your child is enrolled in an eligible educational institution, you can tap a 529 to pay for these categories of expenses:
Tuition, room and board (if enrolled at least half time), books, supplies and required equipment
Computers and peripherals, software, internet access and related tech services
Costs of fees, books, supplies, and equipment required for participation in a certified apprenticeship program
Interest or principal on qualified education loans, up to a lifetime maximum of $10,000 per beneficiary (and per each sibling of the beneficiary)
Tuition at a qualified primary or secondary public, private or religious school, up to $10,000 per year per beneficiary
“Tuition and fees are the biggest college bills you'll probably face, but there are other eligible expenses.”
What’s more, the list of what’s considered “qualified” includes these expenses as well:
- Certified apprenticeship programs: The cost of required fees, books, supplies and equipment for participation in a registered apprenticeship program
- Student loan payments: Interest or principal on qualified education loans up to a lifetime maximum of $10,000 for a designated beneficiary and each sibling of that beneficiary – the lifetime maximum is applied separately for the sibling’s and designated beneficiary’s loans
- K-12 education: Tuition at a qualified primary or secondary public, private or religious school. You’re limited to a federal tax-free distribution of $10,000 total per calendar year per beneficiary for all 529 accounts for that beneficiary.
If there’s still something left over, it can stay in the account indefinitely — and, decades later, you could change the account’s designated beneficiary and the remaining funds can be used to help pay the cost of a grandchild’s education.
While 529 accounts offer plenty of flexibility in paying education expenses, there are costs that cannot be covered with 529 assets. “Using 529 account funds, you could pay for tuition at an accredited institution for your child to get a music degree,” Polimeni says. “But if you use those funds to pay for private piano lessons, you’ll have to pay federal (and possibly state and local) income tax as well as a 10% additional federal tax on the earnings portion of the money you withdraw.” You will never pay income tax or the additional federal tax on the principal portion of your withdrawal, regardless of what it is used for.
What happens to unused 529 funds
The rules are flexible when it comes to how many students can benefit from a single 529 account. Suppose you set aside $200,000 in an account with your child as the beneficiary, and you spend only half of the money. You could change the beneficiary on the account to a member of the beneficiary’s family – including siblings, first cousins or even a niece or nephew – federal income tax-free.
If there’s still something left over, it can stay in the account indefinitely — and, decades later, you could change the account’s designated beneficiary and the remaining funds can be used to help pay the cost of a grandchild’s education. Or it could even be used to fund your own or your spouse’s continuing education. Consult a tax advisor about the tax implications.
There is also new legislation that gives 529s greater flexibility. Effective for distributions made on or after January 1, 2024, 529 assets can be rolled over to a Roth IRA without federal taxes or penalties if the withdrawal meets the following criteria:
- The 529 account has been open for at least 15 years.
- The Roth IRA is in the same name as the 529 account beneficiary.
- The rollover does not exceed (i) Roth IRA annual contribution limits or (ii) the amount of annual compensation (as defined in the Internal Revenue Code) of the Roth IRA owner. However, Roth IRA income limits do not apply to a rollover from a 529 plan account to a Roth IRA.
- The rollover is limited to the aggregate amount of contributions made to the 529 account (and any earnings) before the 5-year period ending on the date of the rollover – and a lifetime rollover limit of $35,000 per 529 account beneficiary.
Beyond 529s: Another way to save for education
If you want to set aside money for educational activities that a 529 account doesn’t cover, you could consider a custodial account under the Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA). “However, there are potential drawbacks to that strategy,” Polimeni notes. These gifts can’t be taken back, and you can’t transfer assets between beneficiaries. What’s more, once the child you designate as beneficiary reaches a certain age — which varies by state — he or she gains control of the account and can spend the money for purposes other than education. UGMA/UTMA assets are also treated less favorably in the federal financial process and therefore could have a greater negative impact on your beneficiary’s federal financial aid package.
Also, any gifts made to a UGMA/UTMA or a 529 account could count against your federal gift tax annual exclusion amount, so you should coordinate your gifts appropriately. Your financial advisor can help you figure out what makes the most sense for your family.
Before you invest in a Section 529 plan, request the plan’s official statement from your Merrill Lynch Wealth Management Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are only available for investments in such state’s 529 plan.
1To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a Section 529 account, such withdrawal must be used for “qualified higher education expenses,” as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. The beneficiary must be attending an eligible educational institution at least half-time for room and board costs to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You can also take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at a qualified elementary or secondary public, private or religious school. Qualified higher education expenses now include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act, and amounts paid as principal or interest on any qualified education loans of the designated beneficiary or sibling of the designated beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the designated beneficiary will count towards the lifetime limit of the sibling, not the designated beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school, apprenticeship expenses, and payment of qualified education loans.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions