529 Plans: Qualified and Nonqualified Expenses

529 Plans: Qualified and Nonqualified Expenses

May 24, 2023

You’ve put in the hard work of saving for college, and now it’s time to start using those 529 plan assets to help with a family member’s education-related costs. But before you begin withdrawing those funds, it’s important to understand the difference between qualified and nonqualified expenses. The charts below provide an overview of some of the most common qualified and nonqualified expenses.

Qualified Expenses

Nonqualified Expenses

Please note: Just because an expense is nonqualified, it doesn’t mean the 529 plan funds cannot be considered a source of payment. The main consequence of paying nonqualified expenses from the
529 plan is that the gains portion of that distribution will be taxed, and it could be assessed a 10 percent penalty. For more information on 529 plans (referred to as “Qualified Tuition Programs”) and for examples of tax and coordination calculations, see the Qualified Tuition Programs section of IRS Publication 970.

*The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.