Need a laptop for college? Look at your 529 plan
Looking to buy that high school graduate a computer for college? Maybe you can use money in that 529 college savings plan to cover the bill.
Many parents might not realize it, but Congress passed legislation in late December that made permanent a rule to treat computers and related equipment as a qualified expense in the 529 world.
Qualified means that you’re not paying taxes on any earnings or facing any penalties when you withdraw that money from a 529 to cover that specific expense.
The computer provision also includes some computer software or Internet access. It’s key, though, that you follow the rules if you want to try this strategy.
Mark Luscombe, principal analyst of tax and accounting at Wolters Kluwer in Riverwoods, Ill., said the computer must be used primarily by the beneficiary when the student is enrolled at an eligible college, university or educational institution.
If your child is a sophomore in high school, for example, you wouldn’t want to buy that computer now for a birthday or the holidays and then try to withdraw money from a 529 plan to cover that bill.
What about that gap year? Malia Obama, the oldest daughter of President Barack Obama and first lady Michelle Obama, brought the “gap year” into the headlines. Instead of going directly to Harvard University, she will take off one year. The gap year is traditionally a way to allow time for traveling or volunteering.
But if you’re buying a computer now and your child is taking a year off, consult a tax professional. Most times, it would not be considered a qualified expense.
Once you save money in a 529 plan, it’s essential to study the steps for how to spend money to make sure that your withdrawals from the plan are tax-free.
Keith Bernhardt, vice president of retirement and college products for Fidelity Investments, said typically you want to take the money out of the 529 plan in the same calendar year as when the qualified higher education expenses occur.
He’s heard of some cases where parents keep spending for a few years and then take all the money out of the 529 plan in one lump sum afterward.
“You’re rolling the dice a little bit there,” Bernhardt said, noting that the IRS has specific rules on withdrawals.
What’s not covered? Money spent for sports activities, insurance payments, airline tickets or bus tickets to get to school and back and health club dues. Bernhardt noted that some special provisions exist for students with special needs.
When it comes to computer purchases, computer equipment or software used for gaming or hobbies would not qualify.
Young Boozer, state treasurer of Alabama and chair of the College Savings Plan Network, said the advantage of the 529 is that earnings can grow tax-free and, if the money is withdrawn properly, then no taxes are paid on earnings.
Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.
This story was originally published May 23, 2016 at 3:08 PM with the headline "Need a laptop for college? Look at your 529 plan."