A 529 plan is a tax-advantaged investment vehicle that offers parents a way to save money for their child's future education expenses. Each state administers its own 529 plan but parents must adhere to federal tax guidelines when taking distributions. The IRS has specific rules governing what you can use 529 plan funds for, and parents need to be aware of which expenses qualify for withdrawal purposes.
Tuition and fees are generally the largest expense that you can use 529 plan funds for. There is no limit on how much money you can withdraw to cover tuition expenses. According to IRS rules, money in a 529 plan can be used to cover tuition expenses only at eligible educational institutions. This includes all colleges, universities, vocational schools or other post-secondary educational institutions that are eligible to participate in federal student aid programs. Educational institutions outside the U.S. may qualify if they participate in U.S. Department of Education aid programs.
You can also take a 529 plan distribution to cover the cost of room and board. To be considered a qualified expense, your child must be enrolled at least half-time. The IRS does not require that students live on campus for room and board expenses to qualify, but there is a limit on the amount of expenses that are covered. As of 2012, 529 plan funds could be used to cover room and board expenses up to the actual amount charged to the student if they reside in campus housing. Students who live off campus are limited to the amount of the housing allowance included in the school's cost of attendance.
Parents can also use a 529 plan to cover the cost of books, supplies and equipment. This includes equipment or services required for students with special needs as a condition of enrollment or attendance. As of 2012, you may use 529 plan funds to cover the cost of computer equipment only if it's required by the school. This also includes required computer software, peripheral equipment such as a printer and Internet access.
If you take a distribution from a 529 plan for purposes other than education expenses, the funds are subject to regular income tax as well as a 10 percent penalty on earnings. The IRS allows an exception for the penalty if you're taking the withdrawal because the beneficiary is disabled or deceased or if you're rolling over the account to a family member. You must roll over the funds within 60 days to avoid a tax penalty.
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