For optimal viewing experience, please use a supported browser such as Chrome or Edge

Download Edge Download Chrome

529 college savings plans: A cheat sheet for common questions

Published on May 5, 2022 | LPL Financial

Whether your child was just born or is heading toward high school graduation, a 529 savings plan may help you put aside funds to pay for college expenses without paying taxes (federal and some states) on any dividends and gains.1 However, 529 plans have some specific rules, regulations, and restrictions that parents must know before college begins. Here are the answers to some of the most commonly-asked questions about 529 college savings plans.

What are qualified expenses?

Generally, 529 funds are tax-free when spent on qualified expenses, such as tuition, books, fees, and room and board. However, understanding what constitutes an eligible expense is sometimes challenging. Here are some things to know about qualified expenses:

  • Books, supplies, and equipment are qualified; however, laptops and other tech devices are qualified expenses only if required for enrollment or attendance at a school.
  • Airfare or driving expenses to and from college are not qualified expenses.
  • Health insurance is not a qualified expense.

Room and board, including off-campus housing, is a qualified expense. However, it is capped at the room and board amount your college estimates in its total cost of attendance. This rule means that if your college publishes its cost of attendance as including $10,000 in room and board, but you have an off-campus apartment that costs $2,000 per month, you may only be able to use your 529 withdrawal to pay for $10,000 of your rent.

What happens if your child gets a scholarship?

Getting a full-tuition scholarship may create a challenge. You may need to change what to do with the 529 funds earmarked to pay for college tuition. Fortunately, several options allow a 529 custodian to avoid paying penalty fees on the 529 funds.2

  • Withdrawal of the scholarship amount from the 529 account is penalty-free but not tax-free.
  • The 529 funds may pay for the student’s postgraduate education.
  • The 529 funds may pay for qualified expenses of grandchildren, other children, or other family members. The beneficiaries of a 529 account may change at any time. As long as the withdrawn funds pay for qualified expenses, they remain tax-free.

When should funds be withdrawn?

It is important to note that any 529 withdrawals must pay qualified expenses incurred in the same year. Taking out funds Dec. 20 and spending them Jan. 2 might result in a penalty, even if the payment is qualified. Schedule withdrawals carefully to avoid problems and ensure that you spend the money on a qualified expense during the calendar year you make each withdrawal.

Another strategy worth considering is that 529 accounts held by grandparents are not a parental asset and the funds withdrawn are counted as the student’s income. This distinction means that waiting until the last couple of years of college to use the grandparent’s 529 funds may help the expected family contribution remain lower during the first few years of college.

Sources

1https://www.usnews.com/education/best-colleges/paying-for-college/articles/2015/06/17/4-common-questions-about-spending-529-college-savings-funds

2https://www.collegechoicedirect.com/home/frequently-asked-questions.html

Related Resources

Webster InvestmentsArticles
Saving for Retirement
Although most of us recognize the importance of sound retirement planning, few of us embrace the nitty-gritty work involved. With thousands of investment possibilities, complex rules governing retirement plans, and the unpredictable future of consumer prices, most people don’t even know where to begin. Here are some suggestions to help you get started. Determine your […]
Webster InvestmentsArticles
Medicare Will Not Cover All Health Care Costs
There are out-of-pockets, limitations and gaps that Medicare doesn’t cover Medicare is a federal health insurance program for individuals aged 65 or older and certain younger people with disabilities. And despite being a widely used program, there are several misconceptions surrounding Medicare, one of the most pervasive being that it will cover all healthcare costs. […]
Webster InvestmentsArticles
Save Smarter, Not Harder: 9 Tips for Navigating an Economic Slowdown
When the economy slows down, everyday life starts to feel more expensive and a little more uncertain. Groceries may cost more. Job security feels shakier. Interest rates could climb. And suddenly, the financial cushion you once had might feel thinner than ever. If you’re feeling the pinch of inflation, higher costs, or unpredictable income, you’re […]

Connect With Us

Learn more about Webster products, services and the communities we serve.