Can I use funds in a 529 account to pay for room and board expenses for my son while he in a co-op semester associated with his undergraduate college education?
As I read IRS publication 970 ( https://www.irs.gov/pub/irs-pdf/p970.pdf ), it says that ‘Expenses for room and board must be incurred by students who are enrolled at least half-time (defined later).’ “Later”, it says that ‘A student is enrolled “at least half-time” if the student is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.’
Given that a co-op is a mandatory part of his education and the school will consider him full-time enrolled, on the surface, it looks like the answer is “yes” – I can use the 529 money to cover his room and board (up to the school’s published amount).
Is he earning credits of at least half-time enrollment for the co-op session? The description link says that he will complete an on-line course during the session, but it’s not clear how many credits he will earn. If he’s not earning credits that qualify him for at least being a half-time student, then I would say he’s not at least a half-time student, so the room and board during the co-op sessions would not be eligible for 529 reimbursement.
I would point out that the description also indicates that the co-op sessions are paid, so seems to me like it’s a good opportunity for him to start learning to pay his own way using his earnings.
Okay, that says that he will remain a full-time student. So if that means that he is getting a full load of credits, then you’re okay. But if he’s not getting credits, I would question what ‘remaining a full-time student’ actually means, and whether it’s eligible.
I would also point out that if you are going to go through all of the 529 plan funds during his schooling without reimbursing this expense (even if it’s eligible), this might be an expense that you could let him pay out of his earnings. Help him set a budget and let this be another learning experience he gets from the co-op session.
Hence why I asked the question here, even after digging through the IRS publication.
Ordinarily, I’d completely agree with you. Unfortunately, he signed a full-year lease for his apartment (with me as the guarantor) anticipating he’d be in classes for two semesters. Based on what the co-ops he is applying for are paying, his monthly rent alone would be more than half of his projected monthly gross income. Add taxes, utilities, food, and transportation, and I don’t think he’d be even breaking even.
Absent that lease, I’d be telling him to either move back home or to find a far cheaper place much closer to whatever co-op he ends up at. Given the lease, the discussions have been closer to “if the 529 can cover the rent, we can make it happen. If it can’t, then we can cover up to the amount we were otherwise going to put into your 529 next year, but that will still leave you covering a whole bunch of it. If neither of those two are feasible, figure out how to do your co-op in a different semester, and we can plan for it better.”
As for whether covering room and board during a co-op semester is going to be the difference maker in terms of his 529 surviving his undergraduate education, that’s going to depend on what the school does with his renewable scholarships during and after the co-op. But that’s another set of conversations – and one that the school itself should be more helpful with…
Okay, this was bugging me, so I decided to come back and comment again.
Since he knew (or should have known) he had co-op obligations to fulfill, the fact that he signed a full year lease without thinking about when he was going to do his co-op term should be on him. I don’t think that you should try to shoehorn what look to be ineligible expenses into the 529 to accommodate for his lack of planning. If you want to give him what you were going to put into his 529, that’s up to you. But he needs to figure out how to cover the co-op session(s) without pushing you into a situation where there could be significant penalties for using 529 funds for ineligible expenses. If that means applying for different co-op opportunities that pay more, finding a roommate for or subleasing his current apartment, or doing his co-op at a different time, that’s up to him. But he needs to understand that lack of planning has consequences, and he’s not going to learn it if you allow him to duck the consequences.
I appreciate your perspective, particularly when it comes to the potential tax / penalty implications if we make an improper choice.
That said, I have a somewhat different perspective on the ‘parenting’ side of the equation. As of now, the only commitment my son has made is the full year lease on his apartment. He is trying to figure out how to fulfill the co-op obligations of his degree program, and how to handle his living situation while co-oping is a very important factor in that decision.
The fact that we are exploring this before he finalizes another commitment (classes or co-op for next semester?) is a good thing in my mind. He is aware of the limits that the Bank of Mom and Dad has and that related flexibility is limited to what’s already in the 529 plan, what’s an allowable withdrawal from the 529 plan, and the amount we were planning to contribute to his 529 plan in 2025.
Exploring potentially feasible options before committing to a course of action is an approach I am happy to encourage. In fact, I am thrilled that he and I are brainstorming possibilities – even ones we ultimately end up rejecting for one reason or another – before he ‘locked’ on a decision that may have ended up being a bad one.
The act of signing a full-year lease may not have been the best decision in hindsight, but on its own, I wouldn’t exactly call it a mistake. After all, he had no assurances at the beginning of the school year that he would be accepted to a co-op for next semester. He made a reasonable choice given what he knew to be true at the time. Now he faces another decision point, and the fact that he has a lease is a factor he has to consider is a key part of the equation he has to keep in mind.
Regarding the original question in the thread, after further digging around, it appears that I’m not the first to ask this question. Here are a few other places where the question was asked:
Again, I think you need to ask the school, not the interwebs, to confirm that ‘remaining a full-time student’ means that room and board expenses during the co-op session are eligible expenses for a 529.
We called the 529 custodian. They put us in contact with an Enrolled Agent at H&R Block. That Enrolled Agent confirmed that the key test was whether the school considers (and will report him as) at least half time enrolled during the time period where he is taking part in his co-op. That Enrolled Agent referenced page 51 of IRS Publication 970.
We confirmed with the school that it will consider and report him as full-time enrolled while he is taking part in this mandatory for his degree co-op.
So it seems the immediate term issue is settled. Thanks for your help and perspective.
The longer-term question of covering costs should his college education last beyond four academic years is still an open one. But that’s a topic for another day.
