How to Spend from a 529 College Plan

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Last Updated: October 25, 2021 References

If you open a 529 college plan, you can save and invest tax-free for your child's education. Both your contributions and the earnings from investments are tax free, provided the funds are used for your child's qualified educational expenses. Keep careful records of any money spent from a 529 college plan to ensure you don't end up having to pay taxes plus a 10 percent IRS penalty.^{[1]
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Part 1

Part 1 of 3:
Calculating Qualified Expenses

1
Start with the amount of tuition. You can pay your child's full tuition tax-free with funds from a 529 account. However, if your child is receiving other tax-free assistance, such as a Pell grant or scholarship, you would reduce the tuition by that amount.^{[2]
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- For example, if your child has $10,000 in tuition each year, and also receives a Pell grant of $2,500 a semester, the amount of tuition you can count towards qualified education expenses would be $5,000.
2
Check the school's estimated cost of attendance. If your child lives in the dorm and has a meal plan through the school, these costs are automatically considered qualified educational expenses. However, if your child lives off-campus, you must use the budget provided by the school.^{[3]
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- For example, suppose your child lives off campus and the university's estimated cost of room and board is $8,500 a year. Your child's apartment (including rent and utilities) and grocery bill come to $1,500 a month. While their living expenses total $18,000 a year, you may only use $8,500 from your 529 plan to pay these expenses.
- Each school releases a budget and estimated cost of attendance each year, typically through the financial aid department. Either you or your child typically will receive this information along with the financial aid application and information. You can also get this information on the school's website.
- Your child must be enrolled at least half-time for living expenses to be included as a qualified expense.^{[4]
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3
Add computer-related purchases. A desktop computer or laptop used for education can be paid for with funds from a 529 plan. You can also use funds from the plan to purchase software for the computer, as long as that software is required for a class.^{[5]
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- For example, if your child is enrolled in a photography course, you could purchase Adobe Photoshop using funds from your 529 plan.
- Internet service also may be paid for with the 529 plan. However, you may only be able to include a portion of this expense, if your child also uses the internet for entertainment or social purposes. Talk to your plan administrator to find out for sure.
- You cannot use 529 plan funds to pay for other electronic devices, such as smart phones or tablets, even though your child may use these devices for educational purposes. You can, however, use 529 plans for computer peripherals, such as printers or scanners.
4
Include required textbooks and supplies. Many students spend over $1,000 a year for textbooks and other school supplies. All textbooks and supplies specifically required for a class can be purchased with 529 plan funds.^{[6]
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- Books that are "recommended" but not required may not be considered qualified educational expenses. Other books and supplemental materials, such as trade magazines or discipline journals, would not be considered qualified expenses even if they relate to your child's education.
- General school supplies, such as pens or pencils, notebooks, and binders, may be purchased with 529 plan funds. This may vary among states, so check with your plan administrator to make sure these basic expenses are covered.

Part 2

Part 2 of 3:
Disbursing Funds

1
Keep track of the school calendar and tuition due dates. While you can make a withdrawal at any time during the year, you have to be careful that you do not withdraw more money from the account than you spend on qualified educational expenses during that calendar year.^{[7]
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- It is all too easy for students (and parents of students) to automatically think in terms of the school year rather than the calendar year. However, IRS penalties relate to amounts withdrawn during the calendar year.
- Mark due dates carefully, and work with your plan administrator well in advance of the due date. It may take several days to sell investments and get the cash you need to pay tuition or other bills.^{[8]
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- Use tuition due dates to create a calendar for withdrawals, so that you're making withdrawals only 2 or 3 times a year, rather than every month.
2
Pay tuition directly from your 529 account. One of the easiest ways to ensure that your withdrawals match your qualified expenses is to have tuition paid to the school directly from the 529 account, rather than transferring funds to your own account or your child's account.^{[9]
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- If your child is living in the dorm, you can also have their room and board expenses paid directly from the 529 account.
- Most colleges and universities allow students to have pre-paid amounts on their student ID to purchase food, drink, and other items on campus. Generally, it's best not to fund this account from a 529 plan, because most of the purchases made won't be considered qualified educational expenses.
3
Open a checking account for other expenses. If your child lives off campus, you might simply write them a check from your 529 account each semester to go towards their living expenses. A dedicated checking account ensures that you have the records of expenses that you need.^{[10]
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- You could open a checking account in your child's name but add yourself as an authorized user. Don't give your child the debit card for the account, and ensure that funds in the account are only used for qualified educational expenses.
- Another option is to have your child give you receipts for qualified educational expenses, such as textbooks or rent. You could then write them a check to reimburse them for those expenses.
4
Determine if you qualify for the American Opportunity Tax Credit. If you spend $4,000 in qualified educational expenses, the American Opportunity Tax Credit will give you a $2,500 credit on your taxes. However, you can't get the credit if you're paying for those expenses with funds from a 529 plan.^{[11]
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- The tax credit begins to phase out for parents with incomes over $80,000. If your income is below that threshold, subtract $4,000 from the total qualified educational expenses so you can get the tax credit.
5
Make qualified purchases separately. If you make qualified and unqualified purchases at the same time, it can make accounting difficult. Funds from the 529 college plan should be used exclusively for qualified educational expenses.^{[12]
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- For example, suppose your child goes to the campus bookstore to get textbooks. At the checkout, your child decides to get a bottle of water and a candy bar. Those items should be paid for separately from their textbooks.
6
Recontribute refunds back to your 529 account. Occasionally, you may overpay for tuition, room and board. If you paid these using 529 funds and the school issues you a refund, you must recontribute the exact amount of the refund into your 529 account to avoid paying taxes and penalties.^{[13]
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- The IRS gives you 60 days from the date of the refund to recontribute the funds into the 529 account. If you wait past that deadline, you may have to pay taxes on that amount plus a 10 percent penalty.

Part 3

Part 3 of 3:
Reporting Plan Withdrawals

1
Keep all receipts for qualified expenses. You must spend the money within the same year that you withdrew it. You may have to provide receipts to your 529 account provider or the IRS.^{[14]
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- If expenses aren't itemized sufficiently on the receipt, you may want to make a note on the receipt so you'll remember later what it was for.
- Keep your receipts together in a separate file, organized by year. At the end of each tax year, put that file along with your other tax records for that year. Save those files for 4 years in the event of an audit.
2
Review your 1099-Q. If you take distributions from your 529 plan, your plan administrator will issue a 1099-Q. The information on this form will also be sent to the IRS. Contact your plan administrator if you don't receive this form by the end of January.^{[15]
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- Box 1 lists your withdrawals. Box 2 reports the portion of that withdrawal that constitutes income or earnings on your initial investment. Box 3 reports the amount of that withdrawal that relates back to your contributions. Essentially, Box 1 minus Box 2 should equal the total amount reported in Box 3.
- Make sure the withdrawals match your own records. If you find a discrepancy, contact your plan administrator as soon as possible.
3
Compare your expenses to your gross distributions. The gross distributions, or withdrawals, reported in Box 1 of your 1099-Q should be equal to the amount you paid for qualified educational expenses.^{[16]
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- Your withdrawals may be less than your qualified educational expenses if, for example, you paid $4,000 on your own so that you could take the tax credit.
- If your withdrawals are more than what you spent on qualified educational expenses, you must report the excess as ordinary income on your tax return for that year.
4
Attach a statement to your return detailing expenses paid. You technically don't have to report your qualified educational expenses to the IRS in any way. However, submitting a statement itemizing those expenses may serve as extra protection from an audit or a deficiency notice.^{[17]
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- You may be at a greater risk of triggering an audit or deficiency notice if you pay your child's tuition directly from your 529 account. Your plan administrator will check a box on the 1099-Q indicating that distributions were not paid to the account beneficiary.
5
Report taxable distributions as ordinary income. If you end up spending part of the money from your 529 college plan for non-qualified expenses, you must pay regular taxes on that money as income. You may also have to pay a 10 percent penalty.^{[18]
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- If all of your withdrawals were spent on qualified educational expenses, you don't have to report anything on your taxes. However, keep in mind that the IRS is getting information about the distributions you received, and may request receipts.

Warnings

Each state has its own restrictions on 529 accounts. You may want to check with a certified financial advisor in your area.^{[22]
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If you cash out any money leftover in the account after your child graduates, you'll be on the hook for interest on the earnings plus a 10 percent penalty.^{[23]
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