Unlocking 529 Secrets: Navigating Education Expenses, Tax Benefits, and Future Savings

Back to school! For some, these are three words we dread all summer, for others it means a house of peace and quiet, and for many, it means it is time to start writing tuition checks.

With school back in session and the summer coming to an unofficial close, we wanted to provide a brief refresher on frequently asked questions regarding 529 accounts:


Question 1: If a 529 is used for qualified education expenses, distributions are tax-free. But what does the IRS categorize as a qualified education expense?

Answer: The IRS’ definition can be a little bit murky (no surprise), but if it is used for tuition, fees, books, supplies, and computers/software/internet (as long as it is for educational purposes), it is a qualified expense, and therefore a tax-free distribution. On-campus room and board can also be considered qualified education expenses as long as the beneficiary is enrolled in school at least part-time. If your student is living off campus, the IRS generally considers up to the amount they would be paying for on-campus housing as a qualified expense. It is important to keep a record of the distributions and payments made in the event of an IRS audit.


Question 2: How do I report the distribution on my tax return?

Answer: Distributions are reported on Form 1099-Q, which is the tax form you will receive from your 529 plans’ custodian. If you do not have any taxable distributions in a given tax year, you are not required to report distributions on your tax return.


Question 3: Can I deduct contributions?

Answer: 529 plans do not provide any federal tax benefits for contributions, but depending on which state you reside in, you may receive a state income tax deduction. These deductions can apply to anyone making contributions, such as grandparents or additional family members, friends, etc. Please contact your advisor with any questions regarding specific state tax benefits.


Question 4: What if my student did not use all of the funds in their 529 account?

Answer: If you are one of the lucky guardians who no longer owes tuition payments for the named beneficiary, but you still have remaining funds in a 529 and are looking to avoid taking a taxable distribution with a penalty, you have a few additional options

  • You are allowed to rename the listed beneficiary on the account to another family member and continue using the funds


  • Per a recent update in the Secure Act 2.0, account holders are now eligible to rollover up to $35k (currently $6,500/year) from a 529 plan into a Roth IRA for the name beneficiary of the plan.


  • Up to $10,000 can be used for student loan repayment


For more information, you can read this timely article in the Wall Street Journal.


Please contact your advisor with any questions related to college planning and the utilization of 529 plans, and best of luck to all of those going off for another school year!