Where Can You Use a 529 Plan?
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Some adults set money aside for a child's education with a 529 plan. These savings accounts feature many tax benefits. For example, savings grow on a tax-deferred basis. This means the government excludes savings put in a 529 plan from taxable income. Savers can make withdrawals tax-free if they use the funds for qualified education costs. Additionally, they lock in today's tuition rates at designated schools.
So where can you use a 529 plan? You can open and use a 529 plan in any state. You can use the funds at a federally approved college. Opening a 529 plan is a major financial decision. Talk to a financial advisor before opening an account.
What Expenses Can 529 Plans Be Used For?
What counts as a 529 expense? To receive the tax benefits, you can only use 529 savings on qualified items. See below for common eligible expenses. You can also consult the IRS to learn which education expenses count as tax deductions.
What Expenses Are Not Covered Under a 529 Plan?
What counts as a 529 expense? Most mandatory educational expenses qualify. However, stay aware of common pitfalls. For example, travel expenses don't qualify as a covered expense, even if required by a course. This means you can't spend 529 funds on a study-abroad program. Health insurance and sports fees also don't qualify as covered expenses.
Even covered expenses don't count in some cases. For example, you can't use 529 funds for optional textbooks used for supplemental reading. Additionally, you can't spend more on room and board than the COA set by your college or university.
Institutions Eligible to Participate in a 529 Plan
So, where can you use a 529 plan? Most accredited colleges and universities count as eligible institutions. Public and private institutions qualify. To find a school's accreditation status, use the U.S. Department of Education's database.
A 529 plan allows you to lock in today's tuition rates. Since tuition rates often rise annually, this could save you thousands of dollars. Talk with a financial advisor for guidance.
What If a Student Doesn't Attend College?
If you or your child don't attend college, the funds won't go to waste. These savings may pay for K-12 tuition or training. For example, you can use the funds to pay for a welding certificate at a community college.
Taxpayers don't receive a tax penalty for leaving funds in a 529 plan. However, they must pay income tax and a 10% penalty on funds used for non-educational purposes. One way to avoid this is to roll the funds over to a different 529 for another beneficiary, such as a sibling.
The government waives the 10% tax penalty in some situations. For example, if the beneficiary dies or becomes disabled, the penalty isn't required. The same is true for beneficiaries who get a tax-free scholarship.
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