Is this a permissible use of 529 money?

My oldest son, who is in college, has a brief study abroad program in the spring semester. Using round numbers, that program will add around $2,000 of travel-related costs to his bursar’s bill. I understand that the travel-related costs cannot come out of his 529 plan, however, he has other scholarship money. If not prohibited by the other scholarships, can I apply those scholarships to the travel costs and apply the 529 money to the standard tuition/room/board costs?

In other words, and again using round number, his “normal” bursar’s bill for the semester would be $15,000 to cover tuition, room, and board. Of that amount, $5,000 would be covered by scholarships, leaving $10,000 to be covered by me via the 529. Because of this study abroad opportunity, his bursar’s bill will be $17,000. The same $5,000 of scholarships still exist, leaving me with $12,000 to cover. That is still less than the $15,000 standard bursar’s bill.

If the scholarships don’t prohibit their use towards study abroad travel, can I cover all $12,000 from the 529?

Thanks in advance for your guidance.

Best regards,
-Chuck
Home Fool

Where you will run into a problem is that the tax-free scholarship amount needs to be deducted from the qualified educational expense amount to calculate the amount that can be withdrawn from the 529 plan tax-free. Since the travel expenses are not qualified education expenses, even if you are allowed to spend the scholarship money on the travel expenses, you still have to deduct the amount of the scholarship from the qualified education expenses. From IRS Pub 529 https://www.irs.gov/pub/irs-pdf/p970.pdf

Assuming the extra $2000 is not a qualified education expense, because it’s for the travel, no, you would still only have $15,000 in qualified education expense - leaving you with only $10,000 that can be covered by the 529 tax-free. Of course, you can always take the extra $2,000 out of the 529 - you will just owe taxes and penalties on the $2000 distribution.

AJ

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Thanks, AJ! That’s exactly why I asked before doing anything.

Regards,
-Chuck
Home Fool

It is worth noting that starting next year, there will be a provision to convert 529 balances to a Roth so don’t pay that penalty if you can wait.

https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth

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Thanks… I think we should be able to cover it, but it becomes a question of what gets cut elsewhere to do so. The easiest answer is that we reduce the 529 contribution for him for next calendar year by the amount of the cost that is not a qualified education expense. That way, the only impact would be the loss of the state income tax deduction on what otherwise would have been the contribution.

Regards,
-Chuck
Home Fool

I seem to recall that if you withdraw 529 funds for qualified expenses covered by a scholarship you pay taxes but no penalties. Maybe it’s changed since my kid was in college.

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Yes, you are correct. I had forgotten that exception. From IRS Pub 970 https://www.irs.gov/pub/irs-pdf/p970.pdf

AJ

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