One of the best ways to save for college is by using a 529 plan.
With the help of long-term college savings, you can reduce your need for student loans by covering 529 qualified expenses like tuition, room and board, and some regular student fees.
However, a 529 plan isn’t a free pass for all the things you need to pay for when you attend college. There are some expenses that can’t be covered by using money from your 529.
How does a 529 plan work?
The whole point of a 529 plan is to provide you with tax advantages when you withdraw money to pay for college expenses. Essentially, distributions are not subject to federal tax. And, they’re generally not subject to state tax when used for qualified higher education expenses by the beneficiary.
However, if the amount distributed is greater than the beneficiary’s adjusted qualified education expenses, taxes may be owed. And, keep in mind however that all contributions to a 529 plan are not deductible.
What’s more, if you use money in your 529 plan for unqualified expenses, those tax advantages disappear. If you’re misusing 529 money for ineligible expenses, contact a knowledgeable financial expert to determine your options.
And if you need to rollover money from one 529 plan into another or change beneficiaries, you have 60 days to do so. Just make sure you haven’t rolled that person’s account in the prior 12 months.
If you aren’t inside the 60-day rollover period but are still in the same calendar year as the distribution, you could potentially pre-pay some of next year’s 529 qualified expenses with that money instead.
Which college costs don’t qualify as 529 expenses?
Most of us don’t set out to misuse our 529 money. But, it can happen. You can avoid a great deal of unpleasantness by understanding which costs aren’t qualified 529 expenses.
We all need insurance when we go away to school. Car insurance, renters insurance, and other types of insurance can protect your assets.
However, insurance costs aren’t 529 qualified expenses, so watch out. Just because you’re driving your car to school, doesn’t mean you can deduct the cost of insuring it.
Speaking of driving your car to school, none of your transportation costs are 529 eligible expenses.
Whether you’re taking the bus, fueling your car, or getting to campus some other way, you can’t use your 529 distributions to cover the cost of your transport.
3. Student loan repayment
It would be great to pay off your student loans a little early, right? Just take some of that money from your 529 and put it towards what you owe.
Sadly, this isn’t an acceptable use of your funds. You aren’t allowed to take money out of a 529 and use it to pay down student loans.
4. Sports and club activity fees
When you enroll in college, there are fees you’ll need to pay. In fact, you might be surprised at how fast student fees add up.
Fees required for enrollment, such as computer lab fees, are usually 529 qualified expenses. However, sports and club activity fees paid as a result of extracurricular activities don’t qualify.
So if you want to join an intramural basketball league, you’ll have to use “regular” money to pay for it.
Where you live can be covered by your 529 money. However, that doesn’t mean that you can use your plan money to trick out your dorm room. Room furnishings aren’t included as qualified 529 expenses.
The same principle applies when it comes to food. You can buy some groceries with your money, but entertainment and dining out aren’t 529 qualified expenses.
6. Exceeding your “cost of attendance”
Every school estimates attendance costs. These costs provide an idea of what you can expect to pay when you attend a specific school.
How much money you can withdraw from your 529 to pay for your living costs are based on the cost of attendance at your chosen school. Therefore, you should do your best to avoid exceeding it.
It’s easy to stay within estimated costs of attendance when you live on campus and buy a meal plan from the cafeteria. But when you live off campus and buy your own food, keep the costs within the cost of attendance at the school.
If you don’t know where to find it, ask the financial aid office for the cost of attendance so you have some guidance.
Keep your costs separate
When you’re using your 529 money to pay for college costs, keep a record of all your purchases. When tax season arrives, you’ll need receipts to back up your claims.
Avoid putting 529 qualified expenses on the same transaction with ineligible costs. If you’re buying groceries for the week, don’t toss shampoo and soap on the same transaction as your food purchases.
While it may seem awkward to divide your purchases and complete two transactions, it could make record-keeping easier. And, you’re less likely to draw the attention of the Internal Revenue Service (IRS) when you prepare your taxes.
Your 529 plan is a great resource for helping you pay for college and reducing your need for student loans. But, it’s not a free-for-all. By planning ahead and knowing which expenses are eligible you can stay within all guidelines listed without issue.
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