To encourage personal and private savings for college expenses, Congress enacted Section 529 of the Internal Revenue Code, Title 26. This statute allows for an authorized tax shelter of savings as long as the funds and earnings are then used for specific and restricted higher education expenses. 529 Plans, as these accounts are called today, exist in all 50 states, and investors can deposit funds in most out-of-state plans if desired. The money is then either placed in a savings account, certificates of deposit or selected mutual funds allowed by the specific state plan.
Generally speaking, funds saved in a 529 plan may be used for typical college and higher education costs. These include school tuition, registration and similar fees, class books and directly-related equipment for classes. The type of higher education institution these expenses may apply to include colleges, trade schools and universities. All institutions must be approved with national accreditation. Lodging and food expense under boarding programs can be allowed as well, but the recipient child must be attending the institution at least on a half-time basis.
However, not everyone lives on campus when they attend a higher education school. Further, some schools have no on-campus lodging facilities. In such cases, 529 rules allow for off-campus living costs such as rent via an allowance amount. The allowance is capped at whatever the schools authorized for room and board on-campus. Obviously, this little quirk doesn’t help those with schools where there is no such program.
Required expenses per Section 529 of the Internal Revenue Code focuses on those charges in which a student has no choice. In other words, to attend the given school, these expenses must be paid by the student. Tuition, registration fees and class books make clear sense, but the authorization gets a bit gray on support equipment, such as a computer, for example. The key factor is what the school says is “required” equipment. So if a school’s brochure or program description says nothing about new students needing a personal computer, then the student will be out of luck assuming the 529 savings will pay for it. This sort of question is where research and planning ahead of time helps make critical choices about saving money in 529 plans.
Authorized expenses obtain funding differently, depending on the specific 529 plan and its administration approach. Alternatives include a plan making direct payments to a school upon receipt of the school’s invoice or reimbursement for expenses incurred and then reviewed by the plan staff. Some plans allow outright withdrawal, leaving documentation proof as a responsibility of the account holder.
Most plans generally bar payment of student loans and their interest as a 529 cost. With regards to other expenses, it varies by state. Some plans are restricted to just tuition. Other plans focus on areas the state government feels have the most abuse or risk. The best approach is to review a state’s plan in detail before depositing.