Understanding 529 Plan Distributions

Ever since your daughter was very young, you have invested in a state-operated 529 plan to help pay for her college education. Now she is ready to start using those funds. Do you know which educational expenses qualify for tax-free distribution from the plan, and which do not?

Here are a few guidelines, based on information in Publication 970 from the IRS, which gives detailed guidance on qualified expenses.

What's Covered

Tuition and required fees are covered in full.
Room and board, if the student is enrolled at least half time. However, such expenses must be not 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; or 2) the actual amount charged if the student is residing in housing owned or operated by the school.
Food: If you spend a certain amount for a meal plan, that entire amount can be deducted, even if used for coffee or ice cream and not a full meal. Weekend meals can also be included if the dining halls are not open.
Books and supplies: Any fees associated with purchasing school textbooks are considered qualified, as are required equipment or supplies such as notebooks and writing tools.
Computers/laptops, but only if required by the school. If required, Internet fees and PDAs or “smartphones” may also qualify. The Savings Enhancement for Education in College Act (H.R. 529), currently under consideration by Congress, would expand this definition to apply to all computer technology used by the student.
Special needs services required by special-needs students that are incurred in connection with enrollment or attendance at school.

What's Not Covered

Student loans: Interest on or repayment of student loans is not considered a qualified expense by the IRS.
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.
Transportation to and from school.
Concert tickets or other entertainment costs, unless attendance is required for a course or curriculum.

Note that expenses must apply to a qualified college, university or vocational school for postsecondary educational expenses. Withdrawals used for qualified expenses are generally free from federal income tax. Tax treatment at the state level may vary, and may depend on your residency status in that state.

Check before you spend funds from a 529 plan. Taxes and a possible 10 percent penalty apply to all distributions that are not considered qualified educational expenses by the IRS.

Contact Clifton Gunderson Wealth Advisors for college planning and investing assistance.

FinancialInsight is brought to you by Clifton Gunderson. In an effort to provide more value to our clients and friends, we've designed this e-publication to share information about the latest personal and business financial strategies to help you evaluate your investments and financial planning. We'll strive to improve with every issue, and you can help by giving us suggestions about what you'd like to see. Just drop us a note at FinancialInsight@cliftoncpa.com with your thoughts. As always, thanks for giving us the opportunity to be your most trusted advisor.

Advisory services offered through Clifton Gunderson Wealth Advisors LLC, a Registered Investment Advisor. Securities offered through CG Brokerage L.L.C., member FINRA/SIPC or securities offered through ValMark Securities, Inc., member FINRA/SIPC – 130 Springside Drive, Suite 300, Akron, OH 44333-2431 (1-800-765-5201). ValMark Securities, Inc. is a separate entity from all Clifton Gunderson companies. CG Brokerage L.L.C., Office of Supervisory Jurisdiction, 8215 Greenway Boulevard, Suite 610, Middleton, WI 53562 (608) 662-8600. The information contained herein is general in nature and is not intended, and should not be construed, as legal, investment accounting, or tax advice or opinion provided by Clifton Gunderson LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Clifton Gunderson LLP or other tax professional prior to taking any action based upon this information. Clifton Gunderson LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.