A 529 education savings plan is a smart way to save for education expenses, as long as the money is spent on approved costs. This article will help you understand all about qualified expenses.

The money you save in a 529 education savings plan grows tax-deferred, and withdrawals for qualified expenses are tax-free. Qualified education expenses are the costs required to enroll in and attend an eligible school. Here are the expenses you can use those funds for:

• Tuition and Fees
  Tuition and fees are considered required expenses. Eligible schools include any private, religious, or public college, university, vocational school, elementary school, and secondary school that is part of the federal student aid program. To find if a particular school qualifies, you can look up the Federal School Code at studentaid.gov. If you plan to use funds to pay for elementary and secondary school education, keep in mind that tuition expenses for K-12 are limited to $10,000 per year.

• Room and Board
  On-campus housing and meal plans are covered. Off-campus housing and food expenses also qualify but can’t exceed the school’s published cost of campus room and board. A student must also be enrolled in school at least half-time.

• Books and Supplies
  Textbooks, supplies, and other materials required by specific classes qualify as education expenses and can be paid for with 529 education savings plan funds. Schools will set the budget limit for books and supplies, so experts recommend checking with the institution on the allowable amount for each academic year.

• Electronic Equipment and Software
  Computers and related equipment are also considered qualified expenses if they’re used primarily for schoolwork. Internet service is also covered as a qualified expense. However, computer software for sports, games, or hobbies is not covered, and smartphones are also not covered. Equipment for a student with special needs, such as a wheelchair, qualifies. Depending on a student’s need, transportation costs may also be a covered expense. Business equipment can also be purchased with 529 funds if the student buys the equipment while in school and actually uses it in college courses.

• Student Loans
  With the passage of the SECURE Act in 2019, borrowers can use tax-free 529 funds to pay off student loan debt without incurring a penalty. Keep in mind that there’s a lifetime limit of $10,000 in student loan payments that can be made penalty-free with 529 funds.

• Have Money Left Over?
  If you happen to have unused funds in your 529 account, you can change the beneficiary to a relative of the current beneficiary, pay graduate school costs, or pay the student loans of a sibling.

Be Careful, As Not All Costs Are Covered

Understanding the rules of your 529 education savings account can help you plan for expenses and avoid making costly mistakes.

You’ll want to avoid paying for expenses that don’t qualify. That’s because those withdrawals are subject to federal and sometimes state income tax plus a 10% withdrawal penalty. Non-qualified expenses include items used primarily for amusement activities or entertainment. You won’t be able to pay for college and application testing fees, insurance, childcare, off-campus gym membership, club sports dues, and travel and transportation expenses with 529 funds either. If you’re not sure if an expense is covered, check with the school’s financial aid office.

To prevent accidentally taking a non-qualified distribution from a 529 plan, check with the school to find out exactly what’s required. If you do incur a penalty, it may be waived if you can prove extenuating circumstances. The college’s financial aid office can provide details.

If the school refunds money that came from a 529 plan, you can recontribute those funds to your 529 plan account within 60 days of receiving the refund. However, the recontribution can’t be more than the refunded amount.

Remember to Keep Good Records

Experts recommend that you keep receipts and make sure that qualified items are purchased separately from non-qualified items.

You should receive an annual statement from your 529 plan administrator, which shows your contributions, earnings, and withdrawals.

Keep in mind that you are responsible for accurately reporting to the IRS. If your withdrawals are the same as or less than your qualified expenses, including earnings, you won’t pay any taxes on the money. But taxes must be paid on any withdrawals that are higher than your qualified expenses, and you may also incur a penalty.

Keeping track can be simple because large tuition bills will typically use up most of your 529 education savings. However, if you are using your 529 plan for other qualified expenses, you’ll want to keep the receipts.

Note: The qualified expenses mentioned in this article are for the 529 education savings plan. If you have a 529 prepaid tuition plan, qualified expenses are limited to tuition and fees and student loan payments up to $10,000.

Understanding the rules can help you get the most out of your 529 education savings plan, enjoy tax advantages, and avoid mistakes along the way. Contact your financial institution if you need more information or would like help with planning for college.