A 529 Plan is a tax sheltered savings account that allows parents to save funds towards their child or children higher education fees. The savings put into this account grow tax-free and withdrawals from the account are tax-free as long as the funds are used towards qualifying higher education costs. Most 529 Plan accounts are run by states although there are some plans that are non-state managed. In most cases, citizens who save in their state run 529 Plan will get some tax relief from their state taxes. 529 Plan accounts also come with the advantage that the accounts are run in the name of the parent as opposed to the child. This way, a child is not disqualified from scholarship and other study aid programs due to the saved college funds.
Spending on Non-Qualifying Expenses
When it comes to withdrawing from a 529 Plan account, parents need to be careful to ensure that the funds are all spent towards qualifying higher education expenses. If a parent spends on non-qualifying expenses, he or she will be taxes on the earnings on the funds and a further 10% IRS penalty. Generally, higher education tuition, fees and expenses that are required for the course will qualify for a 529 Plan account spend. However, below are some further rules as to the qualification of college expenditure:
All the course requirement expenses qualify as long as they are included in the published course requirement write-up. If an expense is not expressly stated by the college, it may not qualify for the 529 Plan. For example, unless the college states that students will require a laptop to undertake a course, then purchasing a laptop cannot be a tax free expense from the 529 Plan account.
Room and Boarding
Generally, rooms and boarding will qualify as a valid 529 Plan expenditure. However, some boarding related expenditure such as bed sheets or a fridge will not qualify unless such expenses are charged by the university as part of the fees.
Special Need Students
A parent with a student who has a special need can spend extra funds on other special need requirements that the student will need so as to undertake the course comfortably. However, such spending needs not be frivolous.
Generally, health insurance expenses will not qualify for tax free 529 Plan account expenditure. However, if a university requires students to have a health insurance in order to get enrolled, then a parent can justify the expenditure from that angle. However, assistance from a tax professional may be needed when spending on such gray areas.
Non Qualifying Expenses
Relocation expenses for the student will not qualify for tax free expenditure under the plan. Transport costs to and from the college do not also qualify, even for students who live off-campus. Other expenses that will also not qualify will include discretionary university expenses such as extra costs for intramural sports or for fraternity/sorority expenses.