What Can 529 Plans Be Used For?

529 savings accounts are one of the most popular college savings vehicles, and for good reason.

Everyone who uses a 529 plan gets the benefit of tax-deferred growth, and all of those earnings can be withdrawn tax-free for qualified education expenses. Depending on where you live, you may also get a state income tax deduction for your contributions.

Those tax breaks are powerful, but they come with some rules on how the money can be used, and potential penalties if it’s not used correctly. In this post we’ll explain exactly what a 529 plan does and doesn’t cover, as well as the alternative savings vehicles available to you, so that you can make the right decision for you and your family.

What Expenses Can a 529 Plan Cover?

One of the biggest benefits of a 529 plan is the fact that you can withdraw the money tax-free for qualified education expenses. The biggest downside is that if you use the money for anything else, the earnings in the account are taxed and also subject to a 10% penalty.

So, what counts as a qualified education expense? It’s a longer list than you might think and includes the following:

1. Tuition and Fees: The most obvious use of a 529 plan is to pay for tuition and required fees at an eligible college or university. This can include undergraduate, graduate, and even vocational programs.
2. Room and Board: Funds from a 529 plan can be used to cover the cost of living on campus or off-campus housing, as long as the student is enrolled at least half-time. Off-campus housing expenses are typically capped at the school’s published cost for room and board.
3. Books and Supplies: 529 plans also cover required textbooks, software, and supplies necessary for enrollment or attendance in a qualified education program.
4. Computers and Technology: If your child needs a computer, internet access, or software for their studies, a 529 plan can be used to pay for those expenses.
5. K-12 Education: In recent years, 529 plans have been expanded to allow up to $10,000 per year to be used for K-12 tuition at private, public, or religious schools. Not all states allow for this though so you’ll want to check before moving ahead.
6. Student Loan Repayment: Another newer benefit is that 529 savings accounts can be used to repay student loans, up to a lifetime limit of $10,000 per beneficiary (and each of the beneficiary’s siblings). This gives families an additional option when it comes to paying off debt.

What a 529 Plan Doesn’t Cover

While 529 plans are flexible, they don’t cover everything. Non-qualified expenses include things like health insurance, transportation, extracurricular activities, and non-required books and equipment. It would also include withdrawals for anything that isn’t related to education, like if you needed the money to help support your day-to-day living expenses.

Any time you make a non-qualified withdrawal, the earnings portion of that withdrawal is taxed and subject to a 10% penalty. 

What If Your Child Doesn’t Go to College?

One of the biggest worries members have around 529 plans, and frankly my biggest concern as well, is what happens if they don’t need the money for college. Their child might not go to college, they might get a scholarship, or it might not cost as much as they expected, and they don’t want to face unnecessary penalties.

The good news is that 529 plans are more flexible than you might think. Here are some things that you do with the money if the child you saved it for doesn’t end up needing it for their undergraduate education:

• Scholarships: If your child receives a scholarship, you can withdraw that amount from your 529 savings account without penalty. You will still be taxed on the earnings.
• Transfer the Beneficiary: You can change the beneficiary on a 529 plan to another family member—such as a sibling, cousin, grandchild, or even yourself—without penalties.
• Vocational or Trade Schools: Many vocational or trade schools are considered eligible institutions under 529 plan rules, so the funds could still be used for qualified educational programs outside of traditional college settings.
• Save for Graduate School: If your child decides to pursue further education later in life, the money can remain in the 529 plan and be used for graduate school.

Alternatives to a 529 Plan

While 529 plans are an excellent tool for education savings, they aren’t the only option. And in some cases they may not even be the best option.

Here are some alternative investment accounts that you can consider when saving for college, including the pros and cons of each:

Roth IRA for College Savings

While Roth IRAs are mainly seen as retirement accounts, they can also be a helpful way to save for college. Here’s why:

• Tax-deferred growth: Investments grow tax-free while they’re in the account.
• Penalty-free contributions: You can withdraw the amount you’ve contributed anytime, for any reason, without taxes or penalties.
• Education expenses exception: If you tap into the earnings before age 59.5 for qualified higher education expenses, you’ll avoid the usual 10% early withdrawal penalty (though the earnings will still be taxed).
• Retirement flexibility: If college funds aren't needed, the money stays put and keeps growing for your retirement.

Maxing out retirement savings—like a Roth IRA—often makes more sense than starting a 529. It ensures you're securing your own financial future first and leaves room to use the funds for other needs down the line. If you are on track for retirement savings anyway (via things like your Roth IRA, 401k, etc) and have extra on top to contribute to college, the tax savings make more sense in a 529 account.

Taxable Brokerage Account

The biggest downside of using a taxable brokerage account is that there are no tax breaks available. No deduction. No tax-deferred growth. No tax-free withdrawals.

However, you can still invest in a tax-efficient manner and you get the benefit of maximum flexibility. Unlike a 529 savings account or Roth IRA, there are no restrictions on how you use the money and no penalties to worry about. Which means that you can use the money for whatever needs come up, whether that’s college, a home down payment, early retirement, or anything else.

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Coverdell Education Savings Account (ESA)

A Coverdell ESA works similarly to a 529 plan, but with some restrictions. Namely, the maximum contribution is just $2,000 per year and there are income limits that may prevent you from contributing at all.

The biggest benefit of a Coverdell ESA is that it can be used for a wider variety of K-12 expenses, not just tuition. You also have access to more investment options, and you still get the benefit of tax-deferred growth and tax-free withdrawals when used for qualified education expenses.

A Coverdell ESA might be the right choice if your focus is on covering small amounts of private school costs or other educational needs before college. (Though as we saw earlier, you can use up to $10k per year from 529s for K-12 expenses, which makes the Coverdell ESA less useful now.)

The Bottom Line: Choosing the Right Plan for You

529 plans are a great way to save for education, thanks to their tax benefits and flexibility to cover a variety of education expenses. Make sure your financial basics are solid first: an emergency fund in place, high-interest debt paid off, and retirement savings on track. If all of that’s covered, a 529 can be an excellent option. However, if your family has several savings priorities or isn’t certain about future education needs, it might make more sense to focus on more flexible investment accounts.

At the end of the day, the best plan is the one that works for your family’s unique situation. If you need help figuring it all out, Fruitful’s financial guides are here to walk you through your options and create a plan that aligns with your goals—so you can feel confident about your child’s future.