Bear Mountain Capital Inc.

College Expenses Covered by 529 College Savings Plans?

| December 15, 2016

Budgeting | Planning Perspectives


The Puzzle of Covering College Expenses

College is expensive. Being prepared and putting money aside in a qualified 529 college savings plan can help you get ready for the onslaught of expenses you and your child will face when your child is ready to leave home for the college experience.

Our friends at American Funds have put together a summary list of qualified and non-qualified distributions from a college savings plan for college expenses, updated for the current tax year. If you have a 529 college plan and you are getting ready to send your child, grandchild or family friend off to school, take note.

Qualified Distributions: Qualified distributions are used to pay for higher education expenses at eligible institutions, including:

  • Tuition
  • Mandatory fees
  • Required textbooks, supplies and equipment
  • If used primarily by the beneficiary during the time the beneficiary is enrolled at an eligible educational institution, the following are included:
    • Computer or peripheral equipment
    • Computer software
    • Internet access and related services
  • Room and board during any academic period in which the beneficiary is enrolled at least half-time in a degree, certification or other program that leads to a recognized educational credential awarded by an eligible educational institution

Remember that the account owner or beneficiary is responsible for determining and designating distributions as qualified or non-qualified. Consult a tax advisor if you’re unsure whether a specific expense is considered a qualified distribution.

Taxes or penalties do not apply to qualified distributions, although some states require taxes on the earnings if the account owner’s 529 plan is not in their state of residence.

Non-qualified Distributions: Non-qualified distributions are made to pay for ineligible expenses. When an account owner makes a non-qualified distribution:

  • The principal (contribution amount) is not subject to taxes or penalties.
  • The earnings are subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.

Exceptions: Earnings on a distribution due to one of the following events are subject to federal income tax but not the 10% penalty:

  • Death of the beneficiary
  • Disability of the beneficiary
  • Scholarship receipt (to the extent of the scholarship award)