You’ve likely had clients ask about using 529 for things other than college. Thanks to updates in the SECURE 2.0 Act and the One Big Beautiful Bill Act (OBBBA), these plans now cover a wider range of goals, from K-12 tuition to Roth IRA rollovers.
To give the best advice, you need a clear grasp of the latest rules, including how to avoid errors and maximize tax benefits for families, business owners and retirees.
Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.
Q: Are charter and parochial schools included in the definition of elementary and secondary education?
A: Yes, it does include charter and private schools.
Q: If you report the earnings as taxable, can you use the entire distribution for the education credit?
A: Yes, you could use the entire distribution for the American opportunity tax credit (AOTC) or the lifetime learning credit (LLC). With that said, there is a limit on expenses used to determine each. For example, the ATOC is based on $4,000 of expenses. If there are qualified education expenses left, those should be used towards the 529 plan distribution.
Q: Do private musical instrument lessons qualify?
A: Usually, no. Private musical instrument lessons do not qualify as a 529 plan qualified education expense unless they are part of an eligible educational institution’s program. 529 qualified expenses are limited to specific tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution. Private music lessons could be covered if: 1) the student is enrolled in an eligible college or K-12 school, 2) the lessons are required for the degree or course of study, and 3) the payment is made to the school or an affiliated instructor as part of the tuition or required fees.
Q: The expenses are expanded for the federal. Does that mean that the states must follow?
A: No. If federal law expands what’s considered a qualified 529 plan expense, states do not have to follow automatically. 529 plans are authorized under federal law, and the federal definition of “qualified higher education expenses” determines whether you avoid federal tax on earnings. However, some state income tax laws are separate. Each state decides whether to: 1) conform immediately to the new federal definition, 2) conform later (often after the state legislature passes an update), or 3) not conform at all. Meaning the expenses might be tax-free federally but taxable for state purposes.
To learn more about the new potential of 529 plans, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing.