53%
of families have a plan to pay for all years of college
Sallie Mae, "How America Pays for College 2023," 8/23.
We frequently discuss the importance of saving early and often to maximize the benefits of your SMART529 college savings plan. But whether you’ve just opened your child’s account or they’re about to put on their cap and gown for high-school graduation, the time will eventually come to put those hard-earned funds toward their intended use. One of the main advantages to your SMART529 plan is the ability to grow your education savings tax-free. Those tax benefits also apply once you begin withdrawing from the account as long as the funds are used toward eligible expenses. Since the earnings portion of non-qualified distributions are taxed as ordinary income and subject to a 10% withdrawal penalty, the following list of qualified expenses can help ensure you’re using your hard-earned savings as efficiently as possible.
Qualified 529 Expenses
- College and University Tuition
Whether your child attends a public or private university or community college, funds in a 529 account can be used toward tuition as long as the school is eligible for federal student aid. The same is also true for graduate school and some schools abroad. - Trade and Vocational Schools and Apprenticeship Programs
More Americans have been ditching the traditional four-year programs in lieu of trade programs, which are often cheaper, offer focused training, and typically take less than two years. Training in these structured programs or via apprenticeships1 qualify for tax-free 529 withdrawals.
- K–12 Schooling
Up to $10,000 of 529 funds can be used for private or religious K-12 tuition per student each year. While most states2 recognize this as an eligible expense, be sure to check that your state also complies. - Student-Loan Repayment
Funds can be used for qualifying student-loan repayments3, which can include both private and federal student loans. When using 529 funds to pay off student debt, there is a lifetime limit of $10,000. - Academic Fees
Students may need to pay fees in addition to tuition, such as technology or lab fees, and can use their 529 plan funds toward them. Activity fees for sports or organizations, however, aren't eligible. - Computers
If the school doesn’t supply your student with a laptop or desktop computer, purchasing one on your own is considered a qualified expense. This benefit also extends to peripherals such as printers. - Internet Access
Internet access is a covered expense for students who live off campus. However, beware of bundling: cable and phone costs may not be covered. - Books and Supplies
In addition to textbooks and class-specific materials, school and office supplies such as notebooks, pens, pencils, are also qualified expenses. - Specialized Software
Educational or professional software required to complete coursework, such as a specialized design program necessary for a graphic-design degree, also qualify as a tax-advantaged 529 expense. - Groceries
If your child is living off campus, food expenses, up to the cost of an on-campus dining plan, can be covered by 529 funds, but the tax advantage only applies to necessities—not dining out or entertainment costs. It’s best to confirm with your child’s school each year to be clear about acceptable amounts. - Roth IRA Conversion
Recent tax reforms now allow 529 account holders to roll over funds from a 529 account to Roth IRA accounts. Learn more here about the newly effective legislation.
This list isn’t comprehensive but provides a general idea of the types of purchases eligible for tax-free SMART529 purchases. If you’re not sure if a particular purchase would qualify or stay within limits, reach out to your financial professional, tax professional, or your school’s financial aid office for clarification.