Parents: Get the 4-1-1 on the 529 College Savings Plan

Have a child who’s headed off to college in the future? It’s never too early to start planning how you’re going to cover the rising costs of higher education. A 529 savings plan can help you save for your child’s (or other dependent’s) college tuition. The rules differ by state (you can look up your state here), but the basics are the same: you make regular contributions to an investment and then withdraw from that pool of money to pay for college-related expenses.

The good news: your withdrawals are tax-free, meaning you won’t be subject to any taxes each time you take out money to pay for a qualified expense.

The bad news: not all college-related costs are considered qualified expenses.

So before your child heads off to earn his first degree, you’ll want to do some homework yourself. Using 529 money to pay for the wrong kinds of expenses will cost you regular income tax plus a whopping 10% penalty.

Qualified Expenses:

  • Tuition
  • Fees required by the university
  • Room and board on campus (if your child is enrolled at least half time)
  • Required course materials (textbooks, course packets, calculators, etc.)
  • On-campus meal plan
  • Off-campus housing (provided it costs equal to or less than the on-campus housing)

Expenses that do not qualify for 529 withdrawal:

  • Off-campus living expenses that exceed the cost of the university’s room and board
  • Fees or materials needed for sports or extra-curricular participation
  • Non-required course materials (for example, a laptop or extra books)
  • Dorm room necessities, such as a mini-fridge, sheets, or space heater
  • Health insurance (unless it’s required by the university for enrollment, in some cases)
  • Travel expenses for your child to visit on holidays

Always check with the rules of your 529 plan before making plans on how to use your funds. And when in doubt, consult your local tax advisor.