Some of the biggest challenges many face when it comes to education are financial. Luckily, a 529 college saving plan can help. And it’s not just for college anymore - added to the tuition eligibility are K-12, private and religious schools. These funds can also be used for four and two-year colleges, trade schools, graduate programs, and some international institutions.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. The state tax treatment, including potential deductibility of contributions, of 529 plans will depend on your state of residence and is only one factor to consider when choosing a savings plan. Also, be sure to consider the fees and expenses associated with the particular plan. State tax laws and treatment may vary, and state tax laws may be different from federal tax laws. Earnings on non-qualified distributions may be subject to ordinary income tax and a 10% penalty.

Here's a list of qualified 529 educational expenses:

Educational Strategy

To take advantage of the 529 distribution for educational costs, you must submit your request for the funds during the same calendar year. If you request cash during the academic year, you may end up owing taxes as a non-qualified withdrawal.

• Higher Education - Post-secondary students (after high school) are eligible to participate in the federal student aid program administered by the U.S Department of Education and qualify for the use of 529 funds.
• Vocational or Trade School – For example, culinary students can draw from their 529 accounts to pay expenses related to culinary institute courses. The institution must participate in the U.S Department of Education for federal student aid.
• Early Education – K-12 schools, public, private, and religious institutions can now use 529 plan distributions for tuition up to $10,000 per student.

Lifestyle and School Supplies

Learning how best to use your 529 distributions while establishing a manageable budget for qualified and non-qualified purchases can be tricky. Here are some tips to keep in mind.

• Housing - Campus housing can be paid through 529 distributions, including college room and board fees. Off-campus housing rentals qualify up to the same cost of the room and board on campus.
• Books and Supplies - paper, pens, and textbooks required by the specific course are qualified expenses. Schools set the budget limit for books and supplies.
• Needs and Services - Special needs equipment and services qualify for 529 distribution. Students using equipment for mobility may be eligible for 529 distribution purchases. Depending on the circumstances, other modes of transportation may also apply.

Welcoming Technology

Finally, many don't realize that computers and some electronics are included on the list of qualified education expenses. Keep in mind that these items must be required as part of the students' study programs to qualify.

• Personal Computer - Computers must be used primarily by the student during any of the years the student is enrolled at the eligible educational institution.
• Software - software may qualify as a 529 distribution expense, but only if it's used by the student and required by a class. For example, technical engineering or design classes may involve computerized assignments.
• Internet - Lastly, under certain circumstances, internet services can be paid for using 529 funds. Check with your internet service provider (ISP) for more details.

The above tips are sure to help get you started, but make sure to check with the school as well as chat with your financial professional to learn more. As mentioned earlier, each state and school may have different restrictions on using 529 funds. If you are unsure about anything, please reach out to a professional to provide some guidance or let us know if we can help!

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Allos Investment Advisors®, LLC.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.

Published for the blog on May 26, 2023 by Allos Investment Advisors®, LLC.