Advanced Underwriting Consultants

Question of the Day – April 13

Ask the Experts!

Here’s the question of the day.

Question: Can my client use her Section 529 account to pay for private high school expense for the account beneficiary?

Answer: Amounts used for high school expenses will be considered nonqualified, and may be taxable—and also subject to a 10% penalty.

Here’s how Section 529 defines qualified higher education expenses for the purpose of determining whether a distribution to pay such expenses are tax free:

The term “qualified higher education expenses” means—

(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution;

(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance

(B) Room and board included for students who are at least half-time

(i) In general In the case of an individual who is an eligible … for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution.

An eligible educational institution is a college recognized by the federal government.  To access a searchable list of such institutions, visit the FAFSA website.

Nonqualified distributions from a Section 529 account come pro-rata from contributions and earnings.  The earnings portion is taxable, and subject to a 10% penalty tax.

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