<p>I work in a financial services office and it's that time of year when many people are accessing their 529 plans to pay for college costs. I have gotten a lot of questions about whether these funds can be used to pay for computers, school supplies and transportation. The computer is the only item that "may" qualify for 529 funds, and that's currently only if SPECIFICALLY required for a class. </p>
<p>People are really frustrated to find out that either (a) their student has a full ride but all the money they saved for college is in the 529 and they can't use it for these items or (b) they are already using the 529 money to pay tuition and other qualified expenses, and do not have other money set aside for additional expenses.</p>
<p>So, my tip for you (and myself as I have a HS senior) is to make sure you have some money earmarked for college expenses that is NOT in a 529 plan or Coverdell ESA. I was contributing to my son's 529 but stopped and will keep some back in money market to cover this type of expense. Just because an expense appears on the COA does not mean it qualifies for these tax sheltered funds.</p>
<p>Very good advice. I, too, have college money that I kept out of the 529s.</p>
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Yes, you may make “non-qualified” withdrawals (up to the scholarships amount) of your 529 savings for those items.</p>
<p>The tax features of the “scholarship withdrawals” are: the 10% penalty is waived and the students only have to report the earnings as their taxable incomes. See <a href=“6 Top 529 Withdrawal Mistakes to Avoid”>6 Top 529 Withdrawal Mistakes to Avoid;
That may impact the students’ financial aid more that the 529 savings.</p>
<p>I don’t see your scenarios as that big of a problem. First, so few get full rides that it isn’t relevant to most people. Full tuition is more common but there is still R&B and books to pay for. Even if spent on non qualified expenses, only the earnings portion is reported and taxed. Taxes will be payed on earnings in non-529 accounts too. The 10% additional tax on withdrawals doesn’t apply if the earnings are included in income because the student received non-taxable scholarships/grants(your full-ride scenario). The tax due on the earnings portion for buying a computer isn’t going to be a lot. The 10% additional tax also doesn’t apply if the student includes the 529 earnings portion as income so the parents can take the AOC.</p>
<p>Also, if you have younger kids coming along that may not get full-rides, in most cases you can change beneficiaries of the 529 plan.</p>
<p>In general it’s good advice to be careful not to over fund 529s. Since there’s no practical limit to how much money can put put into a 529 per year, it’s not a bad idea to wait to top off a 529 until actual college expenses are known. If savings are in the parents’ names, they are assessed the same as a 529 by FAFSA, so it doesn’t necessarily matter where the funds are when FAFSA is filed. </p>
<p>Some states give a tax credit or tax deduction for 529 contributions that might well outweigh the penalty and marginal tax on any gains.</p>
<p>As noted, changing beneficiaries of parent-owned 529s is easily done. A caution though; it’s not possible to change the beneficiary of a student-owned 529.</p>
<p>Yes, the family should have enough funds to pay for travel or commuting to college, a laptop, personal expenses, etc. that are kept outside of a 529. For some families, travel or commuting can be huge expenses, which are not eligible for 529 accounts.</p>
<p>In my state, a person can put money into a regular 529 account for a couple months before they withdraw that money, and still get the state income tax break for that money. It provides a little flexibility in the allocation of the money in the 529 vs. money you keep elsewhere. Of course, your state or investment plan may be different.</p>