That means you should only use your plan to pay for qualified educational expenses. Qualified expenses for college include tuition and fees, books and materials, room and board for students enrolled at least half-time , computers and related equipment, internet access and special needs equipment for students attending a college, university or other eligible post-secondary educational institutions. However, there are some costs that you may believe are necessary, but the IRS does not consider a qualified expense.
In recent years, the IRS has expanded the definition of qualified education expenses to include K tuition expenses and student loan repayments.
The funds in a plan are yours, and you can always withdraw them for any purpose. Yes, room and board is considered a qualified expense if the student is enrolled at least half-time, which most colleges and universities consider to be at least six credit hours per term.
For on-campus residents, qualified room-and-board expenses cannot exceed the amount charged by the college for room and board. Contact your financial aid office for more information. You can use your education savings to pay for college costs at any eligible institution , including more than 6, U. For example, you can be a California resident, invest in a Vermont plan and send your student to college in North Carolina. Some plans may allow you to make a payment directly from your account to another third party, such as a landlord.
Read How to pay your tuition bill with a plan to learn more. Remember, you will need to check with your own plan to learn more about how to take distributions. Depending on your circumstances, you may need to report contributions to or withdrawals from your plan on your annual tax returns.
Generally, you will pay income tax and a penalty on the earnings portion of a non-qualified withdrawal, but there are some exceptions. The penalty is waived if:. However, the earnings portion of the withdrawal will be subject to federal income tax, and sometimes state income tax.
If you have leftover money in your plan and you want to avoid paying taxes and a penalty on your earnings, you have a few options, including:. By Mark Kantrowitz. A college savings plan is a specialized savings account that is used to save money for college.
Each plan account has an account owner, who controls the investments and selects the beneficiary , and one beneficiary. The account owner and beneficiary may be the same person. The money in a plan may be used to pay for the college expenses and K tuition of the beneficiary, tax-free. Many families find that plans work well, helping them achieve their college savings goals.
Named after section of the IRS tax code, which was added in , college savings plans provide families with several tax and financial aid advantages. Contributions to a plan are made from after-tax dollars. Earnings accumulate in a plan on a tax-deferred basis. Qualified distributions from a plan are entirely tax-free.
This yields a more favorable financial aid treatment than student assets. Wondering how your plan may impact financial aid? You can start a plan at any time. There is no limit on the number of plans you can set up. The account owner controls the account, not the child. The child does not gain control over the account upon reaching the age of majority. The account owner can change the beneficiary if the child does not go to college. Anyone can contribute to a plan.
There are no income phase-outs on contributions to a plan. There is no age limit on contributions. There is no age limit for using the money in a plan. If you have money left over in a plan—say the beneficiary gets a substantial scholarship or decides not to go to college at all—you'll have several options. One is to change the beneficiary on the account to another relative, as financial advisor Jay Murray describes in the box above. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school.
Securities and Exchange Commission. Internal Revenue Service. Accessed July 7, Saving For College. Your Privacy Rights.
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These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Best Plans. Table of Contents Expand. What Is a Plan? Understanding Plans. Types of Plans. Tax Advantages of Plans. Other Considerations. Key Takeaways plans are tax-advantaged accounts that can be used to cover educational expenses from kindergarten through graduate school.
There are two basic types of plans: savings plans and prepaid tuition plans. You may transfer the plan to another family member, defined as: Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them Brother, sister, stepbrother, or stepsister Father or mother or ancestor of either Stepfather or stepmother Son or daughter of a brother or sister Brother or sister of father or mother Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law The spouse of any individual listed above First cousin.
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