If you’re one of the growing number of people choosing to not enroll in college, you might be wondering about alternative options for spending your 529 fund. Can you use 529s for less-expensive trade schools, coding bootcamps, or even to pay down existing student loans? Here’s a look at 529-qualified expenses.
What is a 529 plan?
Individuals and their family members use a 529 plan as a long-term investment vehicle that grows tax-free until it’s ready to be spent on qualified educational expenses. The main benefit is that withdrawals will not be taxed federally—and, in many cases, they’re free of state tax, too (you can look up your state’s deduction policy, here). There’s no time limit for using your 529 account and unused funds can be passed onto another beneficiary.
The fund must be spent on educational expenses like tuition, books, computers or for student housing. Otherwise you lose the tax break and have to pay an additional 10% tax on the withdrawal (with some exceptions). Non-qualifying expenses include transportation to school or college, extra-curricular school activities, and application fees (more details on non-qualifying expenses can be found here).
Can I spend my 529 plan on other schools aside from college?
As 529 plans are typically used as long-term investments, people tend to associate them with college. However, you can use your 529 for any elementary, secondary, religious, vocational school or other post-secondary educational institution (including graduate school) that qualifies for federal financial aid, public or private. This also applies to online-only classes, too.
The eligible institution must be accredited, have a signed program participation agreement with the U.S. Department of Education and meet other financial aid and administrative capacity requirements. To know if a prospective school or college qualifies for 529 spending, use this lookup tool (or contact the institution directly and ask).
So something like, say, a coding bootcamp could qualify as long as it’s provided by an eligible college. If it’s run by a private company not known for being an educational institution, however, you’re most likely out of luck.
Can I use my 529 for foreign schools?
There are roughly 400 schools outside of the United States that are considered qualified for 529 spending. To know if a school qualifies, use the Department of Education’s “Look Up a School Code” (select “Foreign Country” in the field that asks you for a state).
Can I use my 529 plan to pay down existing debt?
Fortunately, qualifying expenses for 529 plans have been expanded in recent years. As of 2019, you can withdraw up to $10,000 tax-free for qualified education loan payments. As the site College Investor notes, student loan interest paid with tax-free 529 plan earnings is not eligible for the student loan interest tax deduction, as that would be “double dipping” on tax exemptions. There is also a $10,000 lifetime limit that applies to the 529 plan beneficiary and each of their siblings (this means a family with two children can withdraw a maximum of $20,000 to pay down their student loans).
What if I don’t want to go to school?
Since there’s no time limit for spending your 529 funds, there’s nothing wrong with leaving it aside for later, perhaps when there isn’t a pandemic. You might think you don’t need it now, but people often seek out educational training later in their careers, too.
Another option is to designate someone else in your family who might need the funding more than you. As long as the new beneficiary is a family member (a sibling, first cousin, grandparent, aunt, uncle), the money can be used for qualified education expenses without incurring income taxes or penalties. Most 529 plans allow for the beneficiary to be changed once a year, so that gives you some flexibility on how you choose to spend the money.