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What can you use 529 distributions for?

flutetalkflutetalk Posts: 34Registered User Junior Member
Looking for good resources (old threads, info available on the web that is accurate, etc.) on what are valid expenses for 529 funds. I am certain that tuition and books are acceptable. What exactly would be included as supplies? If you are a music student at a music conservatory is a new instrument a "supply"? I read a computer isn't a valid expense, I see conflicting information on room and board and transportation, etc.. Finally, it appears if you got a scholarship you can remove equivalent money without penalty but would have to pay tax on the gains (if any?). I will also consult our accountant but he has been very hard to reach lately.
Post edited by flutetalk on

Replies to: What can you use 529 distributions for?

  • scottaascottaa Posts: 1,037Registered User Senior Member
    IRS Publication 970 is what you want.
    www.irs.gov/pub/irs-pdf/p970.pdf
  • swimcatsmomswimcatsmom Posts: 14,996Registered User Senior Member
    The IRS publication with the relevant information is IRS 970

    http://www.irs.gov/pub/irs-pdf/p970.pdf

    starting page 54
    I read a computer isn't a valid expense
    It is for 2009 and 2010. This was part of the stimulus package.
    I see conflicting information on room and board
    Room and board is a qualified expense if it meets the following
    They also include the reasonable costs of room and
    board for a designated beneficiary who is at least a
    half-time student. The cost of room and board qualifies
    only to the extent that it is not more than the greater of the
    following two amounts.
    1. The allowance for room and board, as determined by
    the eligible educational institution, that was included
    in the cost of attendance (for federal financial aid
    purposes) for a particular academic period and living
    arrangement of the student.
    2. The actual amount charged if the student is residing
    in housing owned or operated by the eligible educa-
    tional institution.
    You will need to contact the eligible educational institution
    for qualified room and board costs.
    Finally, it appears if you got a scholarship you can remove equivalent money without penalty but would have to pay tax on the gains (if any?)
    You would still pay any taxes but not the 10% penalty.
  • violadadvioladad Posts: 6,641Registered User Senior Member
    A similar question regarding instrument purchase (for a music major) and using Stafford funds. I think the point to address is whether or not you can get a determination from the school as to if they will include/approve a purchase as part of the COA, and provide written documentation stating that fact. It has been known to happen.

    http://talk.collegeconfidential.com/music-major/673438-can-stafford-loan-used-towards-buying-musical-instrument.html

    But again, the tax ramifications and IRS regs are beyong my area of expertise.
  • flutetalkflutetalk Posts: 34Registered User Junior Member
    Thanks to all who replied so far - I will look into the stimulus package materials regarding computers as well as the IRS publication. The room and board issue looks clear since S is full time in a regular dorm. Purchase of instrument(s) as a "supply" looks more complicated but something to consider for the future. I read in a post (not from a FAO) that if you take 529 money out because you got scholarship funds schools will reduce your scholarship by that amount, so that does not look like a viable option. I doubt we will have any trouble "consuming" the 529 funds with just tuition, R&B, school fees, books but I like knowing the parameters and staying out of hot water with the IRS. For instance I saw some caveats on the Web about being sure you take the 529 money out in the same calendar year in which it is paid to the school -- if you take it out too early in anticipation of the next semester's bill you can run into penalties.
  • swimcatsmomswimcatsmom Posts: 14,996Registered User Senior Member
    I read in a post (not from a FAO) that if you take 529 money out because you got scholarship funds schools will reduce your scholarship by that amount,
    I don't believe this is true at all. How would a school even know what you have taken out of a 529 account or what you have used it for. We have taken money out of both our kids 529s and it is not something we even tell the school about.
  • flutetalkflutetalk Posts: 34Registered User Junior Member
    Hi Swimcats (I like your name!) - I, too, don't know how it would work that the schools would see that you had taken out the scholarship amount from the 529, except perhaps in the copy of the taxes they require you to submit? Or on your FAFSA or CSS profile if they have you list what is in child's 529 and it goes down by more than your child's school expenses beyond the scholarship(s). I find the whole thing mind boggling. I thought it was odd if you couldn't take out scholarship funds without penalty, because if you got a full ride merit scholarship at a school (I wish!) and had saved the tuition in a 529 too, then you would be penalized on your taxes when you used the 529 money for non-school expenses.
  • sk8rmomsk8rmom Posts: 5,746Registered User Senior Member
    The 529 principal is treated as an asset, not income, and definitely not as financial aid or scholarships! The gain on the 529 is income if not used for qualified expenses and could affect the following year's EFC. For FAFSA, cashing in a 529 is not different than cashing in stocks. For the IRS, the treatment is different.
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