Can You Use Your 529 Plan Beyond College?
If you are among the growing number of people who are out of college , you may be wondering about alternative use cases for their 529 fund. Can you use the 529 models for less expensive vocational schools, coding starter courses, or even paying out existing student fees? loans? Here’s a look at the expense that qualifies as 529.
What is the 529 plan?
Individuals and their families use the 529 plan as a long-term investment vehicle that grows tax-free until spent on qualified education spending. The main advantage is that withdrawals will not be subject to federal tax – and in many cases they are also not subject to state tax (you can check your state’s withholding policy here ). There is no time limit for using your 529 account and unused funds can be transferred to another recipient.
The fund must be spent on educational expenses such as tuition, books, computers, or student housing. Otherwise, you will lose your tax credit and will have to pay an additional 10% tax on withdrawals (with some exceptions ). Unqualified expenses include transportation to school or college, extracurricular school activities, and application fees (more information on unqualified expenses can be found here ).
Can I spend my 529 Plan on other schools besides college?
Since 529 plans are commonly used as long term investments, people tend to associate them with college. However, you can use your 529 at any elementary, secondary, religious, vocational, or other higher education institution (including graduate school) that is eligible for public or private federal financial aid. This also applies to online classes.
An eligible institution must be accredited, have a signed program agreement with the US Department of Education, and meet other requirements for financial assistance and administrative capacity. To find out if a future school or college is right for 529 expenses, use this search tool (or contact the institution directly and ask).
So something like, say, a coding bootcamp might be eligible if taught by the relevant college. However, if it is run by a private company not known as an educational institution, you are most likely out of luck.
Can I use my 529 in foreign schools?
About 400 schools outside the United States are considered eligible for 529 schools . To find out if a school meets the requirements, use the Department of Education’s “ School Code ” (select “Foreign Country” in the field where you will be asked to indicate the state).
Can I use my 529 plan to pay off my existing debt?
Fortunately, the qualifying costs for 529 plans have increased in recent years. As of 2019, you can withdraw up to $ 10,000 tax-free on student loan payments. Student loan interest paid out of 529 tax-exempt income is not tax deductible on student loan interest , as it would be a “double dip” for tax credits, as the College Investor website notes. There is also a $ 10,000 lifetime cap that applies to the 529 recipient and each of their siblings (meaning a family with two children can withdraw a maximum of $ 20,000 to pay off the student loan).
What if I don’t want to go to school?
Since you have no time limit for spending your 529 funds, there is nothing wrong with putting it off until later, perhaps when there is no pandemic. You might think you don’t need it now, but people often look for educational training later in their careers.
Another option is to designate someone in your family who may need more funding than you do. If the new beneficiary is a family member (brother or sister, cousin, grandparent, aunt, uncle), the money can be used to pay qualified education expenses without paying income tax or fines. Most 529 plans allow you to change beneficiary once a year, which gives you some flexibility in how you decide to spend your money.