Navigating the 529 Savings Plan

The Do's and Don't's of College Expenses

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Though it may seem like the hectic “Back to School” weeks just ended for you or your student, the reality is that the fall semester is about halfway through! Classes for next semester are already beginning to fill up, and with it, comes an important point to keep in mind. “What expenses does my 529 savings plan cover?”

Your family has worked hard saving for college, so when the time comes each year to utilize those 529 savings, your financial planning team strives to make sure that you can stretch each dollar as far as it can go. However, spending 529 funds on anything that doesn’t qualify as an education expense will be taxable, and be hit with an additional 10% penalty – numbers that add up!

The best thing to do to avoid the taxes and penalty is simply to know what qualifies, and make sure that you’re using your 529 dollars to cover these costs first:

  • Tuition – 529 plans were created to cover tuition costs for students, but they also can cover mandatory fees issued by the school. These could include administrative fees, facility fees, and even technology costs for certain courses. Typically, any mandatory or education related fee charged by the university is a qualified expense.

  • Textbooks, computers, lab equipment – The general rule is “If it is required for class, then you can expense it.” A best practice is to save the course syllabus and your receipts, showing that you purchased exactly what was required by the course. Laptops are tricky because they may not be specifically required, even though they are completely necessary in today’s learning environment. If a class uses an online program, make sure to note that as your reason for expensing a laptop. A great example would be an engineering class requires a design program that is only compatible with a Macbook. This would be a perfect opportunity to expense a new Macbook. Even though the school may charge an arm and a leg for supplies, it may be some consolation knowing that you can save hundreds of dollars in taxes by using the 529 plan.

  • Meal Plans – Any university offered meal plan is a qualified expense. Students have to eat, and the IRS understands that! It is important to note though, that if your student is paying out of pocket for off-campus groceries or food, you may only use the 529 for amounts equal to what the school charges for meals. So, unfortunately, you can’t use the 529 to cover that weekly Ruth’s Chris steak dinner. A best practice would be to have a debit card, funded with the exact amount that the school charges for meals.

  • Room and Board – If your room and board is directly from the school, you can expense the amount that they charge you.

  • Rent – If your student is renting an apartment or living off campus, you can expense part of the cost. Every school has a set amount for room and board known as the Federal Financial Aid Limit for housing, which you can usually find by calling the school’s administrative office. You can only expense rent payments up to this amount. Keep in mind that internet, cable, and furniture expenses are not qualified, but gas, electricity, and water would be, up to the limit.

Now that the basics are covered, it may be tempting to apply the 529 expensing pattern to other aspects of your higher education experience. But it pays to be aware. The following “extras” are not qualified expenses under a 529 Plan, despite being tied to campus life.

  • Clubs, Sports, Greek life dues – Is it outside of the classroom? Then it probably is not a qualified expense. Some schools will wrap these charges into your tuition bill, so it is important to pick them out when expensing these bills.

  • Insurance – Most schools require students to have an on-campus health insurance plan to cover infirmary costs. Unfortunately, these fees are not qualified expenses. Renters insurance also does not qualify, as it is not mandatory for housing or education related.

  • Travel – Is your student out of state? It would be great to be able to use 529 funds to cover the plane ticket costs, but unfortunately travel is a non-qualified expense. This includes gas, Uber/Lyft, buses, hotels etc.

  • Bookstore Purchases: When you go shopping for textbooks, you may find a few extra items in your cart. School apparel, gifts, home furnishings, etc. are not qualified, so make sure to exclude them when using 529 dollars. A best practice is to pay for them separately from textbooks, so that your receipts are organized for your records.

Every student has a unique path in college, which means they each have unique expenses. With this in mind, we strive to find the most efficient and effective ways to use your 529 savings, tailored to each student’s needs. If you are ever in doubt about whether an expense qualifies for not, please feel free to reach out to our team. We are more than happy to help navigate your plan with you and your student.

Presented by Jack Lowe, AFM Paraplanner

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