Withdrawals from a 529 account that are used for non-qualified education expenses are taxable as ordinary income and, unless an exception applies, are subject to a federal penalty of 10 percent. Exceptions to the non-qualified withdrawal rules include the investment earnings of a withdrawal made due to the student’s death, disability or receipt of a scholarship.
Each state’s tax rules may differ in its treatment of income from a 529 plan, so it’s important to check with your state or consult a tax advisor regarding specific tax consequences taking withdrawals.
A 529 plan is meant to cover costs required for enrollment and attendance at a school. Things like college application or testing fees, transportation/travel costs, health insurance, extracurricular activity fees, and room & board (if enrolled on a less than half-time basis) are considered non-qualified education expenses.
For K-12, home schooling expenses are not covered by 529 plans.
The Internal Revenue Code (Section 529), which governs college savings plans, outlines Qualified Higher Education Expenses. Generally, qualified higher education expenses include costs required for the enrollment or attendance at a school (tuition, fees, room and board, books, computers). If you are unsure about a particular expense, it’s best to contact a tax professional or contact your 529 plan administrator.
Here’s how you can determine whether your school or apprenticeship is covered by a 529 plan:
Higher Education: Most colleges, universities or vocational schools in the U.S. or abroad that participate in federal financial aid programs are considered eligible educational institutions. This includes schools offering undergraduate and graduate degrees, and other various certification or training. You can check the eligibility of a specific school online at Studentaid.gov/fafsa-app/FSCsearch or contact the school directly.
Apprenticeships: To be covered by a 529 plan, the trade or vocational school must have a federal school code or accept federal financial aid, while the program should be a Registered Apprenticeship Program through the Department of Labor and Industry. You should check with your program sponsor about the program eligibility.
K-12 Education: Most public, private or religious K-12 tuition expenses are covered by 529 plans. If you have questions about your school, check with your state’s Department of Education.