Study up on how to spend 529 funds for college
Tap the tax-free savings plan -- but only for IRS-approved expenses. Buy the wrong thing and you could be hit with taxes and a 10% penalty on your earnings.
Your 18-year-old is on the way to college, and you're tapping into that stash of money you've accumulated over the years in one of those tax-free college savings plans.
But if you want to pay for more than room, board, tuition and books, you'd better check with the federal revenooers first. Buy the wrong thing and you could be hit with taxes and a 10% penalty on your earnings.
Want to use the money to buy a laptop computer for the kid? Maybe you can, maybe not. Want to pay off part of a student loan taken the year before? Forget about it. Got enough for a down payment on a used car so college boy can come home once in a while? You've got to be kidding. Even transportation at school isn't covered.
Since 1996, Section 529 of the Internal Revenue Code has allowed parents, grandparents and others to set aside money in special state-sponsored savings plans for a child's "qualified higher education expenses." A major attraction, of course, is that all the interest earned can be spent tax free -- as long as it's on qualified expenses.
So what are qualified expenses? The code defines them as "tuition, fees, books, supplies, and equipment required for the enrollment or attendance" at school. Pretty black-and-white, for the most part. But needs change every year, and the law stays the same.
What constitutes "supplies" and what "equipment" is "required for the enrollment or attendance" at school?
"One of the questions we get asked the most is, 'Can I use the money to buy a laptop?' " said Joe Hurley, founder of SavingForCollege.com, one of the top Internet sites for information about tax-free savings plans.
Using 529 funds to buy a laptop is one of the squishiest of issues and one ripe for congressional action.
For now, the answer depends on whether a class or the school itself requires students to have computers. An architecture student who has to use modeling software might be able to justify spending 529 money to buy a laptop. But a business major? Probably not.
James Carlin wasn't going to take any chances. For the last two years, the Manhattan Beach resident has been pulling money out of a college account for his son, Jeffrey, a business and accounting major at Cal Poly San Luis Obispo.
Even before his son graduated from high school, though, Carlin had decided that he wasn't about to test the law by using the funds to purchase a computer. Luckily for Jeffrey, he got a laptop as a graduation gift.
- What the Tax Proposals May Mean to You Jan 30, 1992
- Making Cents: Don't Put Just Anything in an IRA Apr 14, 1996
- Put Bonds for College Bound in Parents' Name Feb 03, 1991
