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JUNE 20, 2022

What counts as a qualified 529 expense?

Answered by
Richard Polimeni
Head of Education Savings Programs, Bank of America
Qualified 529 expenses generally include anything a student needs to enroll in and attend an accredited college, university, vocational or technical school. Eligible expenses also include certified and registered apprenticeship expenses, certain payments on qualified education loans, and up to $10,000 per year per designated beneficiary from all 529 accounts for tuition in connection with an eligible private, religious or public primary or secondary school. Withdrawals from a 529 account, including any earnings, are tax-free when they are used to pay for qualified education expenses.Footnote 1
While the rules cover a large range of education costs, "Some expenses that people assume are qualified may not be," says Richard Polimeni, head of 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, head of Education Savings Programs at Bank of America

What education-related expenses definitely qualify?Footnote 1

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 designated beneficiary while enrolled in an eligible educational institution.
  • Expenses related to students with special needs.
  • For students living off campus, rent, utilities and food may qualify, if those expenses do not exceed the allowance for room and board, as included in that institution's cost of attendance. It's a good idea to contact the school's financial aid department for the exact figure.
  • Up to $10,000 per year per designated beneficiary from all 529 plan accounts for tuition in connection with enrollment or attendance at an eligible private, religious or public primary or secondary school.
  • Expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in a registered and certified apprenticeship program.
  • Payment of qualified education loans up to a lifetime maximum of $10,000 for a designated beneficiary or a sibling of the designated beneficiary.Footnote 1
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) Personal living expenses
K-12 tuition ($10,000 per calendar year) College entrance exam fees
Special needs expenses Fees for sports or club activities
Computers, software, Internet access  
Qualified education loan payments (lifetime maximum of $10,000 per designated beneficiary or sibling of designated beneficiary)  
Fees, books, supplies and equipment for participation in a registered and certified apprenticeship program  

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 non-qualified 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 the designated beneficiary's 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 name a new designated beneficiary and decide to use the money for non-qualified purposes, you will be subject to federal and possibly state and/or local income taxes on the account's earnings, possibly including a 10% additional federal tax on the earnings.

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Footnote 1 To 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 designated beneficiary must be attending an eligible educational institution at least half time for room and board to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs to be eligible educational institutions. Some foreign institutions are eligible. You also can take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per designated beneficiary from all 529 accounts to help pay for tuition at an eligible elementary or secondary public, private or religious school. Qualified higher education expenses also 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. They also include 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.
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 designated 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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