A 529 plan can be one of the smartest tools in your financial toolbox when it comes to saving for education. These state-sponsored, tax-advantaged investment accounts offer both tax-free growth and tax-free withdrawals—if the funds are used for qualified education expenses. But what exactly counts as a qualified expense under a 529 plan? And just as importantly, what doesn’t?
If you’re thinking about opening a 529 plan or already have one and are getting close to using it, it’s essential to understand the boundaries. Using funds for non-qualified expenses can trigger taxes and penalties—something no parent or student wants to deal with during the stress of paying for school.
This guide breaks down the common categories that count as qualified expenses, as well as the pitfalls you’ll want to avoid.
The Basics: What Makes an Expense “Qualified”?
In simple terms, a qualified expense is any cost that the IRS deems directly related to education and eligible for tax-free withdrawal from a 529 plan. The list has expanded over the years to cover more scenarios and educational needs, but the foundation remains the same: the funds must be used for education-related purposes.
Let’s dive into the key categories.
1. Tuition and Fees
This is the most straightforward and widely recognized qualified expense. Funds from your 529 can be used to pay for college or university tuition, as well as mandatory fees. It also includes tuition for K–12 education (up to $10,000 per year per student) and eligible vocational or trade schools.
Key points:
- Applies to accredited institutions.
- Can be used for part-time or full-time students.
- Includes K–12 private or religious school tuition (subject to the state’s conformity with federal rules).
2. Room and Board
If your student is enrolled at least half-time, expenses for room and board are also covered—whether they’re living in campus housing or an off-campus apartment. However, there are limits.
The allowance for off-campus housing can’t exceed the amount the school includes in its “cost of attendance” estimate for financial aid purposes. Exceed that, and the excess might be considered non-qualified.
Qualified examples include:
- Dormitory fees
- Rent (within limits)
- Utilities
- Meal plans
3. Books and Supplies
Textbooks and course materials required for enrollment or attendance also count. This can include lab materials, art supplies, and even certain software, as long as they are mandatory for the course.
General supplies like notebooks, pens, or backpacks may not be considered qualified unless specifically required by the school.
4. Computers and Technology
A computer or tablet, along with internet access and educational software, are all eligible if the student is using them primarily for school. That said, entertainment expenses—such as video games, streaming subscriptions, or non-educational software—do not qualify.
Covered items:
- Laptops and desktops
- Printers
- Internet service (only if used by the student)
- Software required by the school
5. Special Needs Services
If a student has disabilities or special needs, expenses related to their educational support services—such as tutoring, equipment, or assistive technology—are generally considered qualified. This ensures that students with additional challenges are not left out of the benefits.
6. Student Loan Repayment
One of the newer additions to the 529-qualified expense list is student loan repayment. You can now use up to $10,000 per beneficiary to pay off qualified student loans. Additionally, another $10,000 can be used for each of the beneficiary’s siblings.
This feature adds a safety net if your child doesn’t use all the 529 funds during their college years.
What’s Not Covered: Non-Qualified Expenses
Understanding what doesn’t qualify is just as important as knowing what does. Here are a few common expenses that trip people up:
- Transportation: Car payments, gas, airfare, or campus parking passes are not considered qualified expenses, even though they’re often necessary.
- Health insurance and medical expenses: While medical care is essential, it’s not classified as an education-related expense under 529 plan rules.
- Cell phone plans: Although smartphones are ubiquitous among students, their cost is not a qualified expense unless required by the school.
- Extracurricular fees: Clubs, sports team dues, or other non-academic activities fall outside the scope of qualified usage.
Using 529 funds on any of these can result in the earnings portion of the withdrawal being subject to federal income tax—and a 10% penalty. Some states may also reclaim any deductions or credits you received when contributing.
Making the Most of Your 529 Plan
A 529 plan works best when it’s part of a broader strategy. Consider the following tips:
- Coordinate with financial aid: Since 529 distributions can impact your FAFSA, time your withdrawals carefully.
- Document everything: Keep receipts and statements to prove that distributions were used for qualified expenses.
- Plan ahead for leftover funds: If your child doesn’t use all the money, you can transfer the plan to another beneficiary or convert unused funds into a Roth IRA (subject to new rules).
Final Thoughts
A 529 plan is a powerful vehicle for funding education, but like any financial tool, it’s only effective if used properly. Understanding what expenses qualify—and which ones don’t—is crucial to maximizing your benefits while avoiding costly mistakes.
As education evolves and expenses change, the 529 plan has shown flexibility. With the right planning, it can support not only tuition but also the many elements that make learning possible in today’s world. Whether you’re just getting started or preparing for withdrawals, clarity on qualified expenses will help you navigate the process with confidence and purpose.
