What Can I Do With That 529 Income?

We get this question every so often. Clients not sure what qualifies as a tax or penalty free withdrawal from a 529 plan. Hopefully we can shed some light on this.

The following IRS web site gives more details:

http://www.irs.gov/publications/p970/ch08.html#en_US_2011_publink1000178531

Although the material is not very exciting, the language therein includes the following:

Qualified education expenses. These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. See Half-time student, later.

1) The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution.

            (a) Tuition and fees.

            (b) Books, supplies, and equipment.

 

 

2) Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution.

3) Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. 

           (a) The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

           (b) The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You will need to contact the eligible educational institution for qualified room and board costs.

So, more simply it appears that:

• Amount for food (inc. groceries and dining out) within the qualified board cost for that college/university. Any amount above that for the enrolled term is not a tax free withdrawal,
• Fraternity housing yes within the qualified room costs for the school, but not for any other fraternity expenses (dues, party funds, etc.,)
• Travel is not on the list (not for travel to and from the university in any fashion) excepting as specifically required by a course the student is taking or to address the needs of a “special needs” beneficiary (student). This exclusion applies to gasoline and all related auto expenses.
• Utilities fall within rent. If the rent and utilities combined are less than the qualified room costs for the college/university the utilities can be reimbursed from the plan assets
• Furniture is not going to make the qualified costs list but sundries may fall into groceries spending (if deminimus) and thus may be covered)

The fees, expenses and features of 529 plans can vary from state to state.  529 plans involve investment risk, including the possible loss of funds.  There is no guarantee a college-funding goal will be met.  Earnings must be used to pay for qualified higher education expenses to be federally tax-free.  The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10% penalty.  By investing in a Plan outside your State of residence, you may lose any State tax benefits.  529 plans are subject to enrollment, maintenance and administration/management fees and expenses.

IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.