Last week a college student emailed a question about using money from his 529 Plan to pay for college costs, including room and board. His question prompted this blog entry.
First some background: Qualified Tuition Programs, commonly known as “529 Plans” after the section of IRS code that created them, offer a great way to save for college with tax benefits. When it comes time to take money out of your account to cover college costs, though, it’s critical to follow IRS regulations in order to avoid penalties.
If you are a student or have dependents who are students in college or nearing college, you may be aware that money you spend on tuition and required books makes you eligible for a really valuable federal income tax credit. Most college students are eligible for the American Opportunity Credit, which can be up to $2,500 per student; in some cases eligibility rules mean that the Lifetime Learning Credit, which is smaller but still a nice credit, must be used. The more you spend on tuition and books, the higher your tax credit will be, up to a limit of $4,000 in expenses. The key, though, is that you can’t count any tuition or book expense that was paid for with money from scholarships or grants, or from tax-advantaged accounts.
Therefore, it’s not generally a first choice to use money from your 529 plan to pay for your entire tuition bill and books. If you do, you won’t be able to claim that great tax credit. Instead, try to use money from your regular savings or use student loan money to pay for your tuition (after any scholarships and grants that may cover part of the tuition).
“But I have this money saved for college in my 529 plan! Are you telling me I shouldn’t use it?” No, that’s not what I’m saying. The good news is that funds from your 529 plan can be used for room and board! So your first choice should be to use 529 plan funds for your room and board expenses, while using money from ordinary accounts to pay for tuition.
How much can I withdraw from my 529 plan for room and board? As mentioned earlier, you want to stay within the rules for Qualified Distributions; those rules are spelled out in chapter 8 of IRS Publication 970. There’s no set maximum dollar amount, since costs vary at colleges across the nation. Instead, the rules refer you to the room and board allowance set by your school for financial aid purposes. You can make qualified withdrawals for room and board up to that amount, BUT it can’t be more than what you actually spent. Therefore some suggestions:
- Look up your school’s room and board allowance and divide it per semester so you have a maximum figure for the current tax year.
- Keep track of your expenses so you can prove how much money your spend on room and board.
In addition to tuition, books, and room and board, you can also make qualified 529 plan withdrawals for special needs services, and for a computer and related equipment that is to be used primarily by the student for educational purposes. See Publication 970 for details.
To learn more about Iowa’s 529 plan, go to www.collegesavingsiowa.com