Qualified and Non-Qualified Expenses of a 529 Plan

By Marc C. Shaffer

If covering the cost of a college education for a child or loved one is a priority for you, there are ways you can do it that are tax advantaged and that allow you to save over time to meet the goal rather than trying to come up with money when the recipient is 18 and going to college. A 529 Plan could be a solution that fits your needs. Not only does a 529 Plan account grow tax free, but as a Kansas or Missouri resident, you get a state income tax deduction to save you money today.

Other state’s rules may differ: https://www.savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth

If you have already saved in a 529 Plan and are ready to use those funds, you may be wondering what is and what is not considered a qualified expense. For a quick reference, here are some of the distinctions:

What is considered a qualified expense?

  • Tuition – The easiest way to make this payment is directly from the 529 Plan to the institution. If we manage a 529 Plan Account for you, please feel free to forward us a copy of your child’s tuition invoice and we can work with the 529 Plan provider to have a check sent directly to the educational institution referencing the Student ID Number.
  • Room and Board – If your child lives off-campus , the approved R&B limit as a qualified expense is set by the college and anything above the level they set is a nonqualified expense and may be subject to potential taxes and a 10% penalty.
  • Technology Items – Examples include computers, printers, laptops and internet service.
  • Books and Supplies – The budget is set by the school and only required items are covered.
  • Student Loan Repayment – Official rules may vary by state.

What isn’t considered a qualified expense?

  • Transportation and Travel – Although these expenses are common, especially for an out-of-state student, they are not covered.
  • Sport and Fitness Club Memberships – Even on-campus memberships are not covered.
  • Insurance/Health Insurance – Even if you are on a school plan that is billed by the school, it is not covered.
  • General Electronics and Cell Phone Plans – Though these items are used often in life and schoolwork, they are considered everyday items and are not covered by the 529 Plan.
  • On and Off Campus Parking

Wondering if the distribution from your 529 Plan is taxable? This flowchart will help guide you through different scenarios.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on November 20, 2020 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.