Not All Expenses Covered by 529 Plans

It's OK to spend funds from your child's 529 college savings plan for computers, the Internet and educational software, but forget about late-night pizzas, football tickets, iPods, gas and computer games. "If you want to buy Madden 2009, that doesn't count," says Mel Schwarz, a Washington, D.C.-based partner in the national tax office at Grant Thornton LLP. "The only change they made this year is they're going to assume you need a computer and you need Internet access in order to go to school. Previously you would have had to make the case that I bought this computer because I was required to have a computer to be enrolled in my classes." Most people struggle to cover just the tuition and housing from their 529 funds, but it is important to know what other postsecondary expenses are and are not covered in case the money is available. Keep in mind there are differences in this regard between prepaid plans and savings plans. Prepaid plans Prepaid plans are more limited, prohibiting computer expenses but generally covering tuition and mandatory fees. The plans' master agreements will outline specifically what is covered, says Schwarz, who has a prepaid plan in Virginia for his children. Those mandatory fees refer to costs that the school requires students pay. That could include access to the health center or the ability to attend some on-campus events for free, but doesn't include optional expenses such as football tickets, he says. "It does not cover room. It does not cover board. It does not cover football tickets. It does not cover books. It does not get him a new computer," Schwarz says. Savings plans With a savings plan, more "qualified higher education expenses" are allowed to be withdrawn tax-free. That list includes tuition, mandatory fees, room and board, textbooks and supplies, and computers, as well as other equipment that is a requirement for enrollment. "This basically means that you can't attend that particular college without those items," says Joe Hurley, a certified public accountant and founder of Savingforcollege.com. Expenses not included are repayment of student loans, entertainment and transportation to and from school, he says. "It's the cost of attending the school, not the cost of getting to and from school," Schwarz says. Lisa Stamatelos has used 529 savings for her daughter attending West Virginia University and another daughter who graduated from Saint Joseph's University in 2007 (and is heading back to graduate school), as well as her own graduate school enrollment and expenses. She's transferred the money into her checking account to pay for tuition, rent, books, computers, printers, calculators and routine apartment costs such as monthly electric and garbage bills. Stamatelos, director of human resources for KVL Audio Visual Services in Ardsley, N.Y., admits that what is covered can be subjective, and she doesn't expense questionable items such as cell phones and food. "To me, I don't really need to push the envelope. There's so many things that are covered, and it's definitely a no-brainer, a no-question," she says. For students who live off-campus, the institutions determine an allowance for room and board that is comparable to on-campus housing costs. If not, then it can't be more than the actual amount charged by the school for the student to live in housing owned or operated by the institution, according to the IRS Qualified Tuition Program guidelines. The off-campus and on-campus costs (which can include utilities for students living at home) apply for individuals who are at least part-time students. Hurley suggests following this standard: If you're living on campus, what is the school going to bill you. In addition, there's often a cap on how much can be spent for living expenses. Schwarz says his interpretation of food allowances mean that if you spend a certain amount for a meal plan (sometimes placed by the school on a debit card), that entire amount can be deducted, even if the student is using it for coffee or ice cream and not a full meal. Hurley says other expenses that could be included are weekend meals, if the dining halls are not open. Use of the health services and fitness center typically will be included in a fixed fee set by the school, but don't expect it to cover extras. Those could include locker rental and towel service. If you have a (physical education) class, and the coach says you must have a clean towel, then that raises the issue of whether or not it's required for enrollment in that class, says Schwarz. Another tricky area deals with costs for on-campus entertainment and a class requirement to attend a film or concert. Schwarz says his interpretation is that allowable expenses are physical items required for the student to be enrolled in the class, not just for an assignment. "I would not think that a ticket to an event, particularly one that is attended by more than just the immediate student body, would be covered under this," he says. Posted July 24, 2009 It's OK to spend funds from your child's 529 college savings plan for computers, the Internet and educational software, but forget about late-night pizzas, football tickets, iPods, gas and computer games. "If you want to buy Madden 2009, that doesn't count," says Mel Schwarz, a Washington, D.C.-based partner in the national tax office at Grant Thornton LLP. "The only change they made this year is they're going to assume you need a computer and you need Internet access in order to go to school. Previously you would have had to make the case that I bought this computer because I was required to have a computer to be enrolled in my classes." Most people struggle to cover just the tuition and housing from their 529 funds, but it is important to know what other postsecondary expenses are and are not covered in case the money is available. Keep in mind there are differences in this regard between prepaid plans and savings plans. Prepaid plans Prepaid plans are more limited, prohibiting computer expenses but generally covering tuition and mandatory fees. The plans' master agreements will outline specifically what is covered, says Schwarz, who has a prepaid plan in Virginia for his children. Those mandatory fees refer to costs that the school requires students pay. That could include access to the health center or the ability to attend some on-campus events for free, but doesn't include optional expenses such as football tickets, he says. "It does not cover room. It does not cover board. It does not cover football tickets. It does not cover books. It does not get him a new computer," Schwarz says. Savings plans With a savings plan, more "qualified higher education expenses" are allowed to be withdrawn tax-free. That list includes tuition, mandatory fees, room and board, textbooks and supplies, and computers, as well as other equipment that is a requirement for enrollment. "This basically means that you can't attend that particular college without those items," says Joe Hurley, a certified public accountant and founder of Savingforcollege.com. Expenses not included are repayment of student loans, entertainment and transportation to and from school, he says. "It's the cost of attending the school, not the cost of getting to and from school," Schwarz says. Lisa Stamatelos has used 529 savings for her daughter attending West Virginia University and another daughter who graduated from Saint Joseph's University in 2007 (and is heading back to graduate school), as well as her own graduate school enrollment and expenses. She's transferred the money into her checking account to pay for tuition, rent, books, computers, printers, calculators and routine apartment costs such as monthly electric and garbage bills. Stamatelos, director of human resources for KVL Audio Visual Services in Ardsley, N.Y., admits that what is covered can be subjective, and she doesn't expense questionable items such as cell phones and food. "To me, I don't really need to push the envelope. There's so many things that are covered, and it's definitely a no-brainer, a no-question," she says. For students who live off-campus, the institutions determine an allowance for room and board that is comparable to on-campus housing costs. If not, then it can't be more than the actual amount charged by the school for the student to live in housing owned or operated by the institution, according to the IRS Qualified Tuition Program guidelines. The off-campus and on-campus costs (which can include utilities for students living at home) apply for individuals who are at least part-time students. Hurley suggests following this standard: If you're living on campus, what is the school going to bill you. In addition, there's often a cap on how much can be spent for living expenses. Schwarz says his interpretation of food allowances mean that if you spend a certain amount for a meal plan (sometimes placed by the school on a debit card), that entire amount can be deducted, even if the student is using it for coffee or ice cream and not a full meal. Hurley says other expenses that could be included are weekend meals, if the dining halls are not open. Use of the health services and fitness center typically will be included in a fixed fee set by the school, but don't expect it to cover extras. Those could include locker rental and towel service. If you have a (physical education) class, and the coach says you must have a clean towel, then that raises the issue of whether or not it's required for enrollment in that class, says Schwarz. Another tricky area deals with costs for on-campus entertainment and a class requirement to attend a film or concert. Schwarz says his interpretation is that allowable expenses are physical items required for the student to be enrolled in the class, not just for an assignment. "I would not think that a ticket to an event, particularly one that is attended by more than just the immediate student body, would be covered under this," he says. Posted July 24, 2009