Can/should I use my 529 plan?

Paying for College
1

<p>I have a 529 plan of about $25,000 from my grandparents, and I am in my 3rd year of college but haven't used any of it yet. If I don't use it for education, though, it's taxable.
It can be used for room & board as an educational expense. For scholarships, though, room & board don't count as educational expenses and scholarship money used for this is taxable income. I am receiving the Goldwater scholarship now, and since I have a scholarship that covers my tuition, this should be covering my housing costs. Because this is going to be taxable no matter what, should I (or, legally, can I) take money from the 529 plan tax-free to cover housing costs even though I have this scholarship money?</p>

<p>Please correct me if I've misinterpretted any of the regulations, too. (There's a reason I'm not in a money-related major.)</p>

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<p>You can use 529 money for tuition, required fees, housing, food, books and required supplies. If your program requires a laptop and software, that is also eligible. (You will find some outdated info on the web that says that all laptops and software are eligible). 529 money used for any of those purposes, up to the official cost of attendance, is not subject to federal income tax. </p>

<p>There is also an exception in federal regs where some of the principal in a 529 account can be pulled out and used for non-educational purposes without a penalty if you receive a scholarship. </p>

<p>You can’t double-count any dollars that are used for federal income tax benefits. Loan money can be used to count towards the spending for the federal college tax credit. </p>

<p>You can also keep the 529 money in the account and use it in the future for graduate school.</p>

3

<p>

If your scholarships cover your tuition, you could/should use the 529 savings on your room & board. However, if your grandparent is the owner of the 529 account, you should use that money on last year of school, as it is reportable on your next year FAFSA. See [Grandparents</a> Faqs on 529s - College Savings for Grandchildren](<a href=“http://www.savingforcollege.com/grandparents/answer.php?grandparent_faq_id=10]Grandparents”>Grandparents Faqs on 529s - College Savings for Grandchildren)</p>

4

<p>The 529 plan is entirely in my name now (my grandparents both passed away), and I know I am not eligible for any federal aid. I have the unusual problem that I sort of have <em>too</em> much money for school. I have a scholarship that covers tuition, plus I now have a scholarship paid directly to me that will cover my room/board. That’s taxable no matter what, right? So can I still use the 529 money anyway at this point and not pay taxes on it?</p>

<p>@charlieschm - I don’t understand what you’re saying about the double counting. Could you clarify this? Also, I had heard that all laptops were eligible. Do you have a reference for this up-to-date information? How exactly is it verified if software/computer is “required”?</p>

<p>For the grad school option, I am planning to go for a PhD when I graduate, which should be fully funded (no tuition + stipend). In this case, I would still be able to use the money for my living expenses, correct?</p>

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<p>IRS Pub 970 chapter 8 has the details:</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p970.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p970.pdf&lt;/a&gt;&lt;/p&gt;

<p>The double counting means you can’t use the same expenses for a tax-free 529 distribution that you use for a Coverdell distribution or an education credit like the AOC. See the reference for the ‘Coordination with’ sections. The law was changed so that laptops now have to be required by the school as part of your course of study.</p>

<p>Besides the tax on the earnings portion of a non-qualified distribution, there is also a 10% penalty. See page 55 for the exceptions to the penalty. I can see the exception for scholarships if someone took a 529 distribution and later was awarded a scholarship. I’m not so sure if the 529 distribution was taken already knowing that scholarships were covering the expenses. You might want to talk to a tax advisor about that.</p>

<p>Chapter 1 has the taxable scholarship details.</p>

6

<p>

Yes, any unused scholarships or scholarship that cover your room/board would be taxable.

Yes, you may because you can not use tax-free scholarships to cover your room/board.</p>

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<p>Good catch 4kidsdad. I forgot about the tax-free part.</p>

8

<p>So the way 529 plans work is if it is in Parent’s name, Parent can not take federal deductions ( you may be eligible for state deductions), the money grows tax free and if it is withdrawn for the educational purposes then there is no federal tax. </p>

<p>So in nutshell the advantage could be that money grows tax free(if it does) and you might be able to take deduction if your state allows it. Other than that the 529 money is considered as a part of your assets and hence 5.64% will be considered towards EFC. Is this understanding correct?</p>

9

<p>In regards to the original poster, maybe one option would be to treat your taxable scholarship money (after tuition is paid) as paying for travel, health care, personal expenses, a car and other expenses that are not eligible educational expenses. Then, you can say that your 529 funds are being used for books, room and board, which are eligible 529 expenses. </p>

<p>Some of the benefits vary by state. In my state of PA, money held in PA’s 529 program is considered very favorably in the formula when applying for PA. state grants to attend college. Also, it is deductible from state taxes (which is 3% savings off the top). PA. allows a person to put money into a 529 a few months before they withdraw it and still receive the tax benefits. </p>

<p>PA. and some other entities also have a program that offers automatic “Sage” scholarships to many private colleges for people who invest in PA’s 529 program. </p>

<p>For parents, one of the best benefits of a parent-controlled 529 is that the parent controls it. The student cannot run off and spend the money on a motorcycle. If one child gets a large scholarship or decides not to attend college, the parent can move the money to another child (or use it for their own continuing education).</p>

<p>I’m not aware of any federal income tax deductions for putting money into a college savings plan. The savings are in the avoidance of taxes on the gains.</p>

<p>My understanding is that 529 accounts held by the parent or student are treated like parental assets, and the formulas assume that 5.64% is available each year for college expenses. Unfortunately, if you have multiple kids, that is 5.64% of all of your kids’ 529. (Unless someone can correct me?)</p>

<p>The key is to minimize the funds held in the student’s name (except for the usual summer job earnings, 529 account and work study earnings).</p>

<p>Parents should just make sure they don’t overfund a 529 to the exclusion of saving for their own retirement. After all, funds in a retirement IRA usually don’t count at all in financial aid formulas. It is not hard to borrow for college, but it is really hard to borrow to pay for your own living expenses after you run out of retirement savings.</p>