Malcolm Rivera
A 529 plan is a tax-advantaged investment account designed to cover education-related expenses. It offers tax-free withdrawals on qualified expenses, which include tuition, fees, room and board, books and supplies, computers, and special services. While contributions to a 529 plan are not deductible, the earnings are not subject to federal or state tax when used for qualified education expenses. As of 2018, qualified expenses include up to $10,000 in annual tuition expenses for elementary and secondary education, as well as apprenticeship and student loan repayment fees. It's important to understand which costs qualify as mandatory fees to maximize the benefits of a 529 plan and avoid penalties.
| Characteristics | Values |
|---|---|
| Tax treatment | Withdrawals are federal income tax-free as long as they don't exceed the beneficiary's adjusted qualified higher education expenses. |
| Gift tax limits | In 2025, up to $19,000 per parent, $38,000 per couple, and $38,000 per set of grandparents can be saved in a 529 account. |
| Investment options | Mutual funds or ETFs, with age-based options available. |
| Qualified expenses | Tuition, fees, room and board, books and supplies, computers and software, and other school-related costs. |
| Non-qualified expenses | Health insurance (unless required for enrollment), college application and testing fees, and books and supplies not required for a class. |
| Rollover rules | Unused funds can be rolled over into a Roth IRA account for the beneficiary if the 529 account has been open for at least 15 years and the funds have been in the account for at least 5 years. The lifetime rollover limit is $35,000 per beneficiary. |
| State differences | Each state has its own 529 plan with unique features, and there may be differences in the definition of "qualified higher education expenses" for tax purposes. |
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What You'll Learn
Health insurance
A 529 plan is a savings account that offers tax benefits when used for qualified education expenses. These expenses include tuition fees, room and board, books and supplies, computers, and student loans. However, not all expenses related to education qualify for tax-free withdrawals, and it is important to understand the limitations to maximize savings and avoid penalties.
To verify if health insurance qualifies as a mandatory fee for a 529 contribution, it is recommended to check with the 529 plan provider, a tax professional, or the college's financial aid office. Each state may have different limitations on what constitutes a qualified expense, so consulting a financial or tax advisor can provide specific guidance based on individual circumstances. Additionally, it is important to note that student health insurance coverage is not considered a qualified education expense under the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit.
While health insurance may not be covered by a 529 plan, college students have options to ensure they have adequate health coverage during their studies. Students can choose to remain on their family's health insurance plan, enroll in a campus health plan, or purchase their own individual insurance plan. Understanding the options and requirements for health insurance is crucial for ensuring continuous coverage and making informed decisions about education-related expenses.
In conclusion, while health insurance is generally not a mandatory fee for a 529 contribution, there are specific circumstances where it may qualify. It is important to carefully review the requirements of the college or university and consult with relevant professionals to make informed decisions regarding the use of 529 plan funds for health insurance expenses.
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College application and testing fees
A 529 plan is a tax-advantaged investment account designed specifically for education expenses. It offers tax-free withdrawals on qualified expenses, which include tuition, fees, room and board, books and supplies, computers and software, and other materials directly related to school.
However, not all education expenses qualify for free withdrawals, and misusing 529 plan withdrawals can result in penalties. For example, college application and testing fees incurred before official enrollment do not qualify as mandatory fees for a 529 contribution. While health insurance is typically not covered, it may qualify if the institution requires it as part of a comprehensive tuition fee or explicitly states that it is mandatory for enrollment or attendance.
It is important to understand which costs qualify as qualified education expenses to maximize your savings. Qualified expenses include costs required for enrollment or attendance at a college, university, or other eligible post-secondary educational institution. This includes tuition at any accredited private or public college or university, community college, technical school, graduate schools, and professional schools across the US and many abroad.
Additionally, 529 plans can cover K-12 tuition expenses of up to $10,000 per beneficiary per year, apprenticeship expenses for programs approved by the US Department of Labor, and student loan repayment of up to a $10,000 lifetime limit per individual.
To avoid penalties, it is crucial to only withdraw funds for qualified expenses. If you withdraw money for anything that doesn't meet the criteria, it will be taxed as ordinary income and may incur a 10% federal penalty. However, the penalty may be waived in certain circumstances, such as the death or disability of the beneficiary or if they receive a scholarship or attend a US military academy.
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Tuition and fees
In addition to tuition, fees associated with a 529 plan include room and board, books and supplies, computers and software, and other materials directly related to school. Books and supplies include textbooks, lab materials, safety equipment, notebooks, and any other items that are mandatory for student courses. Computers and internet access are also considered qualified expenses, as long as the beneficiary primarily uses this technology during their enrollment years.
It is important to note that not all education expenses qualify for free withdrawals, and misusing 529 plan withdrawals can result in penalties. For example, college application and testing fees incurred before official enrollment do not qualify as 529 plan expenses. Health insurance also typically cannot be paid for with a 529 plan, unless it is required as part of a comprehensive tuition fee or is explicitly stated as mandatory for enrollment or attendance.
To maximize the benefits of a 529 plan, it is important to understand which costs qualify as qualified education expenses. Withdrawals from a 529 plan are tax-free only if they are used for these qualified expenses. Additionally, contributing more than the federal gift tax limit of $19,000 per parent or $38,000 per couple in a 529 account in 2025 may result in gift tax consequences.
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Room and board
For off-campus housing, qualified expenses are limited to the college's cost of attendance allowance. If the student lives on campus, their qualified room and board costs will equal the actual invoice amount charged for housing owned or operated by the college. This typically includes housing costs and a meal plan.
It's important to note that not all expenses qualify for tax-free withdrawals, and misusing 529 plan withdrawals can result in penalties. To avoid this, it's recommended to keep receipts for room and board expenses. Additionally, withdrawals must match the payment of qualifying expenses in the same tax year.
For students living off campus, the withdrawal from a 529 plan is limited to what would be paid for the student to live on campus. Any amount above this threshold would not be considered a qualified expense.
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Books and supplies
The cost of books and supplies for on-campus undergraduate students at a 4-year university was $1,290 for the 2024-2025 academic year. This figure can be used as a guide when planning for education expenses.
It is worth noting that not all books and supplies are covered by 529 plans. For an expense to qualify, the books and supplies must be required for participation in a class. If they are not mandatory for the course, they do not qualify as a 529 expense.
In addition to books and supplies, 529 plans can also be used to cover other education-related costs, such as tuition fees, room and board, computers, and software. These plans offer tax-free withdrawals for qualified expenses, making them a powerful tool for saving for education.
Furthermore, 529 plans can be used for apprenticeship-related costs, including fees, supplies, and necessary tools. To qualify, the apprenticeship program must be registered with the Secretary of Labor's National Apprenticeships Act.
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Frequently asked questions
Mandatory fees for a 529 contribution include tuition, fees, room and board, books and supplies, computers and software, and other materials directly related to school.
Examples of mandatory fees that can be covered by a 529 plan include textbooks, lab materials, safety equipment, notebooks, and other items required for student courses.
Yes, there are some fees that do not qualify as mandatory fees under a 529 plan. These include health insurance (unless it is required for enrollment), college application fees, and testing fees incurred before enrollment.
Withdrawing funds from a 529 plan for non-qualified expenses may result in taxes and penalties. The withdrawn amount will be taxed as ordinary income and may incur a 10% federal penalty.
Yes, there may be exceptions to the penalty in certain circumstances, such as the disability or death of the beneficiary, receipt of a scholarship, or attendance at a US military academy.
