The Basics Q&A: What Expenses Can a 529 Education Savings Account Cover?

Q: I just opened a 529 account for my daughter. How can I use it?


A: Assets in a 529 education savings account have to be spent on qualified education expenses in order for the earnings portion of a withdrawal to come out of the account tax-free. Besides tuition and fees—the biggest educational bills you'll probably face—other eligible expenses generally include such things as room and board; books; computers and peripheral equipment; computer software; Internet access and related services; required supplies; and certain expenses in the case of a special-needs beneficiary, as defined by the Internal Revenue Code.

And, you can request a federal tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or religious school. State tax treatment may vary.

Richard J. Polimeni
Director, Education Savings Programs,
Bank of America

Here’s an example of where you might run into problems if you try to test the limits of what "qualified education expenses" means: Using 529 account funds in an account with your daughter as the designated beneficiary, you could pay for tuition at an accredited institution for your daughter to get a music degree. But if you use those funds to pay for private piano lessons, you’ll have to pay income tax as well as a 10% additional federal tax on the earnings portion of the money you withdraw. You will never pay income tax or the additional federal tax on the principal portion of your withdrawal, regardless of what it is used for.

What if there’s money left over after my daughter graduates?

“If there’s something left over in a child’s 529 account, it may be able to stay in the account indefinitely—and, decades later, be rolled over to help pay the cost of a grandchild’s education.”

—Richard J. Polimeni,
Director, Education Savings Programs, Bank of America

The rules are fairly flexible when it comes to how many students can benefit from a single 529 account. Suppose you set aside $200,000 in an account with your daughter as the designated beneficiary, and you spend only half of the money. You could transfer the rest to a 529 account for certain other members of your family, including your son or even a niece or nephew. If there’s something left over, it may be able to stay in the account indefinitely—and, decades later, be rolled over to help pay the cost of a grandchild’s education. Or it could even be used to fund your own or your spouse’s continuing education.

If you want to set aside money for lessons or other educational activities that a 529 account doesn’t cover, you could consider a trust or a custodial account under the Uniform Gifts/Transfer to Minors Act (UGMA/UTMA). However, there are potential drawbacks to that strategy: These gifts can’t be taken back and you can’t transfer assets between beneficiaries. What’s more, once the child you designate as beneficiary reaches a certain age—which varies by state—he or she will be free to spend the money for purposes other than education. If that’s a concern, you may decide you’re better off using a typical savings account to earmark money for educational goals that a 529 account doesn’t cover. Your financial advisor can help you figure out what makes the most sense for your family.