What 529 Plans Cover (and What They Don’t)

A 529 plan is a common way for parents to contribute money toward their child’s future college expenses. There are a number of advantages to a 529 plan, including convenience and some tax advantages.

That said, although you can use money in a 529 plan for a range of qualified expenses, there are some expenses the plan won’t cover. To avoid costly penalties, you might want to have separate savings for these non-qualified expenses.

Expenses Covered by a 529 Plan

A 529 plan offers advantages like tax-deferred growth and tax-free distributions for qualified expenses. In other words, you won’t pay federal income tax on 529 plan withdrawals (or state income tax, in most states) as long as you’re using the money to pay for qualified education expenses.

A wide range of expenses count as qualified higher education expenses. Some expenses require that a student be enrolled at least part-time at an eligible institution to count as qualified. Expenses you can expect a 529 plan to cover for your college student include:

• Tuition: You don’t need to meet a minimum threshold (e.g., part-time enrollment) to pay for tuition with 529 plan money.

• Fees: College fees can vary from one school to another. Common fees include student service fees, which go toward campus activities or services like a career center, or lab fees.

• Books: A single textbook can cost up to $400, and the average student spends about $600-$1,200 annually on textbooks.

• Supplies: If you need additional supplies for a course (e.g., art supplies), you can cover these with 529 plan funds, too.

• Equipment: This includes a computer and related equipment (e.g., mouse), as well as an internet plan.

• Software: You can count software as a qualified expense if it’s primarily educational in nature. So, word processing software or design programs for an art student would qualify. Software that’s related to hobbies or gaming wouldn’t count.

• Special needs services: College students with disabilities can use their 529 plan to cover special needs services related to their college attendance.

• Assistive and adaptive learning equipment: Similar to covering special needs services, a 529 plan can cover assistive software or other adaptive learning equipment. Adaptive chairs, wheelchairs or campus transportation services for students with disabilities may also fall under qualified expenses.

• Off-campus room and groceries: You may be able to cover rent and meal plans. Students living off campus can designate food and utilities as a qualified purchase, as long as the amount spent is less than or equal to what is included in the college’s cost of attendance allowance for room and board. The student may need to keep careful records (e.g., grocery receipts, utility bills) of off-campus expenses.

• Study abroad tuition, fees, program fees and room and board: A study abroad or exchange program’s tuition and fees can count as qualified expenses, as well as the program’s accommodations.

College Expenses a 529 Plan Won’t Cover

While a 529 plan can come in handy for a range of expenses, there are also important college expenses that don’t count as qualified expenses. Using your 529 plan to cover these would result in a non-qualified withdrawal, which would be subject to income tax and a 10% penalty. Here are some expenses you’ll need an alternative way to pay for:

• Health insurance: Health insurance doesn’t count as an educational expense under 529 plan distributions.

• Health services: Many colleges offer mental health resources and services and may offer some free or reduced-cost options. That said, even if a college employs a therapist who works with students, those sessions wouldn’t qualify as educational expenses.

• Transportation: Gas or airfare for students to travel between campus and home can be expensive, but are not considered qualified expenses under a 529 plan.

• Airfare for study abroad: A 529 plan may cover study abroad program fees and tuition, but a 529 plan cannot cover a student’s needs to get from their home campus to another country.

• College application fees: This may seem like it should be a qualified education expense, but in the IRS’s eyes, applying to college is different enough from enrolling that these fees don’t count.

• Standardized testing fees: Similarly, although many colleges expect to see SAT or other standardized test results, these fees aren’t closely related enough to enrollment and attendance to qualify.

• Extracurricular activity fees: College is about academics, but also making friends and pursuing passions. You’ll need an alternative way to pay for dues for campus sports, extracurriculars or Greek life.

• Cell phone bills: Internet expenses qualify because a student needs to access campus emails and class software, but calling home, while important, doesn’t meet IRS standards for higher education expenses.

• Dorm furniture and decor: Want to spruce up your dorm room or furnish an off-campus apartment? You’ll need a separate way to pay if you don’t want to face 529 plan penalties.

• Living expenses: College students may need to budget a certain amount for various expenses. This might include off-campus housing costs that exceed qualified expenses, clothing, personal care or spending money.

How to Plan for All Your College Expenses

You have a few options to prepare for covering college costs that don’t count as “qualified.” One strategy is to pay as you go from your own accounts. This can give you clear oversight of your student’s spending. For example, you could make your student an authorized user on your credit card and monitor their purchases.

A downside to this is your child may not have the same insight into your budget and might overspend at inconvenient times. You may already have enough on your financial plate paying for your own household expenses and possibly a portion of tuition as well.

You could set the expectation for your child to work, either on or off-campus, to earn money for non-qualified expenses. This can teach them time management and responsibility. However, it may also be challenging for students to earn enough, and their work hours could compromise study time.

Another option is to contribute money to an account for your child, such as a Uniform Gifts to Minors Act (UGMA) account. If you start when your child is young, time is on your side, as small contributions can add up over time (and earn investment gains). This might also ensure that your child has their own money as they take their first steps into adulthood. A potential downside is that you won’t have control over the money once your child comes of age and takes over the account. A UGMA may also reduce your child’s eligibility for need-based financial aid.

Fabric by Gerber Life and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.