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Save Smart, Spend Smart: 10 Qualified 529 Expenses

Avoid paying unnecessary taxes on 529 withdrawals by sticking to qualified expenses.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.



One of the main advantages of a 529 plan is the ability to grow your education savings tax-free. Those tax benefits also apply once you begin withdrawing from the account as long as the funds are used toward eligible expenses.

Since non-qualified withdrawals are taxed as ordinary income and may also be subject to a 10% federal income tax penalty, the following list of qualified expenses can help you avoid paying unnecessary taxes and ensure you’re using your hard-earned savings as efficiently as possible.

Postsecondary education tuition: Whether your child elects to attend a public or private college, community college, or an accredited trade or vocational school after graduation, your 529 savings plan funds can be used toward tuition as long as the school is eligible for federal student aid. The same is also true for graduate school and even some schools abroad.

Living on-campus: As long as your child is enrolled in a degree or certificate-seeking program at least half time according to the school’s guidelines, his or her room and board on campus is considered a qualified expense.

Living off-campus: Most colleges set student allowances for room and board. The cost of rent and utilities up to the school’s allotment is considered qualified, but any amount above the allowance could be subject to taxes.

Groceries: This also ties into living off-campus. Food expenses up to the cost of an on-campus dining plan can be covered by 529 funds, but the tax advantage only applies to necessities—not dining out or entertainment costs. It’s best to confirm with your child’s school each year to be clear about acceptable amounts.

Academic fees: Students may need to pay fees in addition to tuition, such as technology or lab fees, and can use their 529 plan funds toward them. However, activity fees for sports or organizations are not eligible.

Books and supplies: In addition to textbooks and class-specific materials, school and office supplies, such as notebooks, pens, pencils, etc., are also covered by 529 funds.

Computers: Technology is critical for learning today, and if the school doesn’t supply your student with a laptop or desktop computer, purchasing one on your own is considered a qualified expense. This benefit also extends to peripherals such as printers.

Specialized software: In addition to hardware, educational or professional programs required to complete coursework count as a tax-advantaged 529 expense. For example, if your child is completing a graphic-design degree, his or her specialized design software would be eligible.

Internet access: It’s the internet age, so that computer and software won’t get your child very far unless they can get connected. Students who live off-campus and aren’t on the school’s network can use 529 funds for internet service. However, beware of bundling: cable and phone costs may not be covered.



K-12 schooling: Thanks to recent tax reform, 529 funds aren’t just for big kids anymore. You can now use up to $10,000 per year of 529 money toward private or religious K-12 tuition in most states (it’s best to check with your home state first to be sure they’ve aligned with the federal tax change).

 

This list isn’t comprehensive, but can give you a general idea of the types of purchases eligible for tax-free 529 purchases. If you’re not sure if a particular purchase would qualify or stay within limits, reach out to your financial advisor, tax professional, or the financial aid office of your child’s school for clarification.

Sources: Hartford Funds, IRS.gov, and USNews.com, 5/19





This material is provided for educational purposes only.

Before investing, an investor should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s 529 plan.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Hartford Funds Distributors, LLC serves as distributor and underwriter for some 529 plans.

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