Key takeaways
- 529 savings plans can cover qualified educational expenses at all levels, including graduate school.
- The money you contribute to a 529 plan is federally tax-deferred, and eligible withdrawals from these accounts are tax-free.
- Money from a 529 plan can be used for both traditional and online degree programs, as long as they are offered by an accredited institution.
A 529 savings plan is designed to make it easier to save for higher education at every level, from primary school to a graduate program and beyond. As long as your institution and expenses are eligible, you can enjoy the tax benefits of a 529 plan while also reducing your reliance on graduate student loans.
What is a 529 savings plan?
A 529 plan is a tax-advantaged education savings plan. You can use these funds for K-12 education, apprenticeship or certificate programs, undergraduate education or graduate school.
Using your 529 savings plan for graduate school
While many parents use a 529 savings plan to cover a student’s undergraduate education, 529 plans can also be used to help pay for a graduate degree. If you’re considering using a 529 plan for graduate school, make sure you’re confident the expenses are covered and the institution is eligible.
Eligible financial institutions
To use your 529 savings plan funds for your graduate studies, you must attend an eligible educational institution. In general, that includes any college, university, vocational school or other postsecondary institution eligible to participate in the U.S. Department of Education’s student aid program.
This includes most graduate and professional schools in the U.S. and some foreign educational institutions. So whether you’re going to medical school, dental school or business school, the chances are high that you’ll be able to use your 529 plan funds.
Your school should be eligible if it’s on the Department of Education’s database of accredited postsecondary institutions and programs.
Expenses covered
A 529 savings plan can be used to pay for qualified education expenses. According to the IRS, that includes tuition, fees and other related expenses incurred by:
- You or your spouse if you file a joint tax return.
- A student you claim as a dependent.
- A third party, including relatives and friends, named as the plan’s beneficiary.
Beyond tuition and fees paid directly to an accredited institution, other expenses can include:
- Books.
- Supplies.
- Equipment.
- Room and board if you’re enrolled on at least a half-time basis.
- Computer-related expenses.
Note that this list applies to 529 savings plans but not necessarily to 529 prepaid tuition plans, which are different accounts with more limited uses.
You won’t pay the tax or penalty on your contributions because the government has already taxed that money. You will, however, be responsible for paying taxes on any investment earnings earned on the account. If this applies to you, your account servicer should issue a 1099-Q form for tax-filing purposes. And remember that any purchases made on ineligible expenses are subject to a 10 percent penalty.
One exception to this rule: If the student receives a scholarship, the student or their parents can withdraw up to the scholarship amount and use that money without penalty. You will, however, need to pay income taxes on the portion of the withdrawal attributed to investment gains.
Can a 529 plan be used for online degree programs?
If you’re pursuing an online graduate degree, you’ll be happy to know you can use your 529 funds to pay. For courses to qualify, you must be enrolled in an accredited program at an eligible school.
What are the drawbacks of using a 529 plan for graduate school?
One downside of a 529 savings plan is that it’s an investment, which means market volatility will affect your account balance. If you invest the money in a 529 plan in stocks or mutual funds with the goal of growing your savings over time, you face the potential of losing money in your account in the near term.
Considering this risk is especially important if you’re saving for graduate school at the last minute. After all, investments are never guaranteed to show a positive return, but that’s especially true over timelines of a few years or less. If you’re putting money into a 529 plan that you may need soon, the possibility of seeing your account balance drop should be on your radar.
Money in a 529 plan can impact your eligibility for financial aid, and 529 funds in your name have a greater impact on aid eligibility than those held by a parent for their child. All 529 assets must be claimed on the Federal Application for Federal Student Aid form (FAFSA), which will impact eligibility for loans, grants and other funding.
Who should use a 529 plan for graduate school?
The main benefit of 529 savings plans is that money can grow tax-free, and distributions are tax-free when used to cover eligible higher education expenses.
If you live in a state that offers tax benefits for contributions made to a 529 savings plan, using one can help lower your tax burden while making it easier to cover college expenses.
In general, 529 plans for graduate school make the most sense if:
- You’re a high earner looking for ways to maximize tax advantages.
- You have money left over in a 529 plan after paying for undergraduate education.
- You started saving early.
Bottom line
A 529 savings plan for graduate school can make it easier to afford your degree and reduce the federal or private student loans you need. Doing so will also mean the amount you have to repay doesn’t change based on the current student loan interest rate environment.
Consider other education savings plans, such as a Roth IRA. Shop around and compare your options to pick the best option for your circumstances.
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