What 529 Can Be Used For — And What It Can’t

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Named after Section 529 of the Internal Revenue Code, these plans are sponsored by states, state agencies, or educational institutions and are authorized by the Internal Revenue Code. In this blog post, we will delve into the specifics of what 529 can be used for, the federal guidelines governing these plans, and California-specific regulations. By understanding the rules and limitations, you can make informed decisions about utilizing your 529 plan effectively.

What 529 Can Be Used For

Qualified Education Expenses

Under federal guidelines, a 529 plan can be used for a variety of qualified education expenses. These expenses include:

1. Tuition and Fees: Payments made for enrollment or attendance at an eligible educational institution.
2. Room and Board: Costs for housing and meal plans, provided the student is enrolled at least half-time.
3. Books and Supplies: Expenses for books, supplies, and equipment required for enrollment or attendance.
4. Computers and Internet: Computers, software, and internet access used primarily by the beneficiary during any years the beneficiary is enrolled at an eligible educational institution.
5. Special Needs Services: Services required by a beneficiary with special needs in connection with their enrollment or attendance at an eligible educational institution.

These qualified education expenses are covered under federal law, making it clear what 529 can be used for without incurring penalties.

What 529 Can Be Used For: K-12 Education

Recent changes in federal law have expanded the use of 529 plans to include K-12 education expenses. Specifically, up to $10,000 per year per beneficiary can be used for tuition at public, private, or religious elementary and secondary schools. This provision provides greater flexibility for families looking to utilize their 529 plans for earlier stages of education.

What 529 Can Be Used For: Student Loan Repayment

Another relatively recent addition to what 529 can be used for is student loan repayment. The SECURE Act of 2019 allows for up to $10,000 to be used from a 529 plan to pay off student loans for the beneficiary and their siblings. This extension helps families manage student debt more effectively while leveraging the benefits of their 529 plans.

What 529 Can’t Be Used For

While 529 plans offer considerable flexibility, there are still restrictions on their use. Understanding what 529 can’t be used for is crucial to avoid penalties and additional taxes.

Non-Qualified Expenses

Expenses that do not fall under the qualified education expenses category are considered non-qualified and will incur a 10% penalty on the earnings portion of the withdrawal, as well as federal and state income taxes. Non-qualified expenses include:

1. Transportation and Travel: Costs related to commuting or traveling to and from school.
2. Health Insurance: Even if the institution requires students to have health insurance, these costs are not covered.
3. Entertainment and Lifestyle: Expenses for activities or items that are not directly related to education, such as sports club memberships, movie tickets, or vacation travel.
4. Room and Board Beyond Limits: If the cost of room and board exceeds the allowance for off-campus housing set by the school, the excess amount is considered non-qualified.

Penalties for Misuse

Using 529 funds for non-qualified expenses will result in a 10% penalty on the earnings portion of the withdrawal and subject the amount to federal and possibly state income taxes. It is essential to keep detailed records and receipts to substantiate that the withdrawals are used for qualified expenses.

California-Specific Regulations About What 529 Can Be Used For

California aligns closely with federal guidelines regarding what 529 can be used for, but there are specific nuances worth noting for residents of the state.

Tax Benefits and Contributions

California offers state tax benefits for contributions to 529 plans. Contributions to California’s 529 plan, ScholarShare 529, are not tax-deductible, but the earnings grow tax-deferred, and withdrawals for qualified education expenses are tax-free. Additionally, California does not tax the earnings on 529 plan distributions used for qualified education expenses.

ABLE Accounts

California residents can also benefit from ABLE accounts, which are similar to 529 plans but designed for individuals with disabilities. These accounts allow for tax-advantaged savings to cover expenses related to the disability, and they can work in conjunction with 529 plans to maximize financial planning for families with special needs.

Proposition 98 and Educational Funding

California’s Proposition 98, passed in 1988, requires a minimum percentage of the state budget to be spent on K-12 education. This measure underscores the state’s commitment to funding education and may influence how families plan their education savings strategies, including the use of 529 plans.

Final Thoughts on What 529 Can Be Used For

Understanding what 529 can be used for and what it can’t is essential for maximizing the benefits of these education savings plans. While federal guidelines provide a broad framework, state-specific regulations, such as those in California, add another layer of consideration. By adhering to the rules and staying informed about updates, families can effectively use their 529 plans to support educational goals from kindergarten through college and beyond.

If you have questions or need further assistance with your 529 plan or any other legal matters related to education savings, don’t hesitate to contact Lewman Law Firm. Our experienced attorneys are here to provide the guidance and support you need to navigate these complex issues.

About Lewman Law Firm

Lewman Law Firm is dedicated to providing expert legal counsel with a focus on education law, financial planning, and tax-advantaged savings plans. Our team brings extensive experience and a deep understanding of the legal intricacies surrounding 529 plans, and many other complex legal and estate issues, ensuring that our clients make informed decisions to maximize their peace and help them thrive. Lewman Law Firm offers personalized solutions to your legal concerns, and we are committed to helping families achieve their goals while safeguarding their financial investments. Contact us today to learn how we can assist you with your 529 plan.