Many parents save money in a 529 plan to take advantage of tax benefits for education expenses. However, with increasing tuition, housing, and other college costs, families often find that their 529 savings are not enough to cover the full cost of college.
Despite this, an underfunded 529 plan can still help reduce a large part of college costs, as withdrawals are tax-free when used for qualified education expenses.
Qualified expenses include tuition, mandatory fees, books, required supplies, computers, internet access, and room and board for students enrolled at least half-time.
However, room and board expenses have limits, especially for students living off campus, and using 529 funds for unapproved expenses can lead to income taxes and penalties.
The IRS also allows families to use up to $10,000 per year from a 529 plan for tuition at public, private, or religious elementary and secondary schools.
To avoid tax issues, families should make sure the withdrawal and education expense happen in the same tax year, and keep all tuition bills, housing invoices, receipts, and payment records for tax purposes.
It's also recommended to spread withdrawals across all four years to account for rising college costs, and to avoid exhausting the account too early.
Families can also use 529 plans for vocational programs, apprenticeships, certification programs, and limited student loan repayment, and can transfer the account to another eligible family member if needed.
Under current rules and limitations, some unused 529 funds may also be rolled into a Roth IRA for the beneficiary, giving families more options and reducing pressure to spend every dollar during college.
