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Marc Hebert's Money $ense: What's allowed, and what isn't, in Section 529 distributions

By MARC HEBERT
May 19. 2018 9:44PM




Many parents save for college by consistently making contributions to Section 529 Plans set up for their children. If you are one of these and your child is college bound, here is a list of covered and noncovered expenses to help make the most of your child's 529 plan.

What's covered

Tuition and fees required for enrollment or attendance are covered in full for post-secondary education at an eligible education institution.

Under the new provisions in the Tax Cuts & Jobs Act, up to $10,000 per year per child can be used to pay for K-12 tuition. This includes public, private, and religious schools.

Expenses for special services are covered for a special needs beneficiary that are incurred in connection with enrollment or attendance for post-secondary schooling.

Room and board is covered if the student is enrolled at least half time. But such expense must not be more than the greater of (1) the allowance for room and board, as determined by the school, that was included in the cost of attendance for federal financial aid calculations; or (2) the actual amount charged if the student is residing in housing owned or operated by the school. Consult with the college for qualified room and board costs.

If you spend a certain amount for a meal plan, then that entire amount is an eligible expense. This includes food that isn't quite a full meal such as coffee or ice cream. Weekend meals can also be included if the dining halls are not open.

Fees associated with purchasing textbooks are considered qualified, as is required equipment such as notebooks and writing tools. Supply expenses are covered for post-secondary education only.

Computers, laptops, and peripheral equipment are covered only if required by the school and for only post-secondary education. This does not include equipment used primarily for amusement or entertainment.

What's not covered

Interest on or repayment of student loans is not considered a qualified expense by the IRS.

The $400 spent on food and drinks for a Friday night party, even if a "study" party, will not qualify.

Insurance, sports or club activity fees, and many other types of fees that may be charged to students but are not required as a condition of enrollment are not covered.

Transportation to and from school isn't covered.

Also not covered: concert tickets or other entertainment costs, unless attendance is requisite to a course or curriculum.

Record keeping and taxes

Keep good records on the use of the funds. Be sure to coordinate the withdrawals with expenses considered the basis of the American Opportunity or Lifetime Learning tax credits and for costs already covered by tax-free educational assistance.

Check the state tax implications for both contributions and withdrawals. Some states may not have updated their own tax codes, many of which now let account holders retain the existing benefits of saving funds in a 529 account while also using the money to pay for K-12 education. If you live in certain states and you withdraw funds before the tax code update becomes implemented, you may risk having to repay a state tax deduction you have already received or state tax on the investment gains in your account.

Also, keep in mind that taxes and a possible 10 percent penalty will apply to all distributions that are not considered qualified.

Finally, more information is available in IRS Publication 970, Tax Benefits for Education. For this information, check the IRS website at www.IRS.gov.

You may also want to discuss your situation with your tax or financial adviser.

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.


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