529s Aren’t Just for Kids

While many think of a 529 plan as a way to help fund a child’s college education, these accounts can be useful beyond a traditional four-year degree.

Once you understand the 529 withdrawal rules, this educational savings account could open up future opportunities for you, or your family.

What Can a 529 Account Be Used For?

A lot of costs associated with education are considered 529 qualified expenses, but some are more common than others.

Typical 529 Qualified Expenses

• Tuition, including any public or private elementary and secondary school, as well as two- or four-year college programs, apprenticeships and vocational programs

• Mandatory fees associated with an educational program

• Computers

• Books

• Supplies and equipment

• Room and board, if the student is enrolled at least part time

Alternative Ways to Use 529 Account Funds

529 accounts are often used to fund a child’s education, but they’re not just for tuition—or for young people. In fact, there’s no age limit to their benefits. Adults can use a 529 account to support anything from continuing education courses to a graduate degree or vocational training.

Moreover, 529 qualified expenses are not limited to students working toward a degree or certified program. However, the educational institution must be considered eligible by the federal government.

Because 529 withdrawals aren’t limited by age or enrollment, adults can use the funds later in life to train for a career change or take classes to pursue a hobby. That could include enrolling in community college to learn more about computer science or attending an eligible culinary school to pursue a lifelong pastry passion. Using 529 account funds for tuition does not mean committing to a full degree or program.

Just like a full-time student, adults enrolled part-time or in a single class can also use 529 accounts to pay for expenses, including books and supplies. However, they are likely unable to use it for room and board.

Important 529 Withdrawal Rules

Using 529 funds for qualified expenses comes with tax benefits. You won’t pay tax on the withdrawal if an expense is qualified. However, there may be an instance where you choose to withdraw from a 529 account to cover a nonqualified expense.

In that case, the withdrawal is subject to state and federal tax and a 10% penalty on gains. However, you can withdraw your initial investment penalty-free if you had previously made post-tax contributions.

There are several exceptions that avoid the 10% penalty of nonqualified 529 withdrawals, which include:

• The student beneficiary is awarded a scholarship. In that case, the beneficiary can withdraw up to the amount of the scholarship without penalty.

• The death of the student beneficiary.

• The student beneficiary enrolls in a service academy in the U.S.

While these circumstances will spare the withdrawal from a 10% penalty, gains will still be subject to taxes. Because the money you contributed to the account has already been taxed, only the account’s earnings will be taxed.

What Happens to Unused 529 Money?

If you have a 529 account in your name with funds you do not plan to use for education, you have a few options:

• Pay off qualified student loans. The 2019 SECURE Act allows individuals to pay up to $10,000 of qualified student loans from their 529 account without penalty. The legislation also makes it possible to pay up to $10,000 of a sibling’s qualified student loan debt out of the same 529 account without changing beneficiaries.

• Change beneficiaries. If the beneficiary of the 529 account does not plan to use the funds, the beneficiary can be changed to another family member without tax penalties.

• Withdraw the funds as a nonqualified expense. If there’s no other option, you may choose to withdraw funds from a 529 account, incurring taxes and the 10% penalty.

529 accounts are more than just a vehicle for a child’s education—they can help spur career growth and training for adults tax-free. The key is understanding qualified expenses to avoid penalties and taxes.