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APRIL 12, 2019

What counts as a qualified 529 expense?

Answered by
Richard Polimeni
Director, Education Savings Programs, Bank of America
Qualified expenses generally include anything a student needs to enroll in and attend an accredited college, university, vocational or technical school. Beginning in 2018, eligible expenses may also include up to $10,000 per year per designated beneficiary from all 529 accounts for tuition in connection with enrollment or attendance at a private, religious or public primary or secondary school. Money can be withdrawn tax-free from your 529 education account to pay for any qualified expenses.Footnote *
While the rules cover a large range of education costs, "some expenses that people assume are qualified may not be," says Richard Polimeni, director, Education Savings Programs at Bank of America. "It's important to know the difference."
"Some expenses that people assume are qualified may not be. It's important to know the difference."
— Richard Polimeni, director, Education Savings Programs at Bank of America

What education-related expenses definitely qualify?

Money from a 529 account can be used for major post-secondary education costs such as:
  • Required tuition, fees, books, supplies and equipment
  • Certain room and board expenses, which may include food purchased directly through the college or university (for the stipulations of off-campus living — see below)
  • Computers or peripheral equipment, software and the cost of Internet access if used primarily by the beneficiary while enrolled in a post-secondary educational institution
  • Expenses related to students with special needs
In addition, for students living off campus, 529-qualified expenses for room and board may include rent, utilities and food not purchased directly from the college or university if those expenses do not exceed the allowance for room and board, as included in its cost of attendance. It's a good idea to contact the school's financial aid department for the exact figure.
Qualified vs. nonqualified expenses
Qualified Non-qualified
Enrollment fees Travel expenses
Tuition College test prep
Certain room and board (on-campus) Health insurance
Certain rent, food and utility bills (off-campus) Student loan payments
K-12 tuition ($10,000 annual limit) Personal living expenses
Special needs expenses College entrance exam fees
Computers, software, Internet access Fees for sports or club activities

What's not eligible?

Here's where things may get confusing. "Many people assume travel is covered," Polimeni says. "After all, students need to get to and from school. But as far as the tax law is concerned, expenses such as gas, parking and airfare are considered nonqualified expenses."
Likewise, pre-enrollment expenses such as test prep courses, are, unfortunately, ineligible. So is health insurance, even if purchased through the school.
Costs of extracurricular activities, from ballet lessons to membership dues at a sorority or fraternity, are also not eligible.

What if you saved more than you need?

There are plenty of options: Use the extra funds for that student's graduate school, designate a new beneficiary from among certain members of their immediate or extended family, or even name yourself. The same tax (and other) benefits apply so long as the money is used for qualified education expenses. If you don't have a new beneficiary and decide to use the money for other purposes, you will be subject to federal and possibly state and/or local income taxes on the account's earnings, including a 10% additional federal tax on the earnings (with certain exceptions).
Help when you want it
Footnote * To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Section 529 accounts, such withdrawals must be used for qualified education expenses, as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax as well as state and local income taxes. For distributions after December 31, 2017, qualified education expenses include tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school. These distributions are limited to $10,000 per calendar year, across all 529 accounts for the same beneficiary. State tax treatment may vary.

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.

Before you invest in a Section 529 plan, request the plan's official statement from your Financial Solutions Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider carefully before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection against creditors that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

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