Qualified 529 Spending

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The University of Virginia is back in session and Charlottesville was crowded with students last week stocking up for college. Total cost for attendance this year at UVa is estimated at $17,764 for Virginians and $35,644 for non-residents. While most of the bills can be paid from a 529 college savings account, a couple thousand dollars in expenses will not qualify.

My son, our oldest child, is starting college this fall as a film major at the North Carolina School of the Arts. He has two 529 plans which will help cover the costs of becoming the next M. Night Shyamalan.

With careful planning and a 529 college savings plan, you can reduce the cost of college by taking advantage of the plan’s tax-free benefits. Understanding what qualifies for a tax-free withdrawal is important in order to receive the maximum benefit from the plan.

All that stuff for the dorm room and even that new laptop computer may not qualify as higher education expenses, according to Uncle Sam. In fact, that pack of no. 2 pencils probably won’t make the cut. Understanding what qualifies and keeping careful records is important if the IRS questions your withdrawals.

Qualified tuition programs like 529 savings plans have incentivized saving for college much like the IRAs have done for retirement. The simple beauty of these tax-efficient plans allows investments to grow tax-free and permits tax-free withdrawals on qualified education expenses like tuition, fees, books, supplies and – in most cases – room and board.

The IRS defines a tax-free 529 distribution as a qualified higher education expense at an eligible educational institution. But to qualify for the tax-free benefits, your withdrawal will have to pass two important tests.

First, it must be incurred for the purpose of education at an eligible institution. Eligible institutions include most colleges and universities in America, specifically those qualified to participate in the Department of Education’s student aid program. Some post-secondary institutions outside the US also qualify. To check for the list of eligible institutions, visit www.napfa.org.

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