What Your 529 Plan Can Pay For, and What It Can't

Mike Germain, CFA

Sep 29

6 min read

The list of qualified expenses has grown well beyond college tuition. Knowing where the lines fall is what keeps a tax-free withdrawal from turning into a taxable one.

Many families open a 529 plan when a child is born and give the rules little thought until the first tuition bill arrives. By then the question has shifted from how much to save to what the money can actually be spent on. The answer matters because the tax benefit depends on it. Earnings in a 529 plan grow tax-deferred and come out free of federal income tax when used for qualified education expenses, as the IRS explains in Publication 970. Spend the money on something outside that definition and part of the withdrawal becomes taxable, usually with a penalty on top. Federal legislation in 2025 widened the list considerably, so it is worth revisiting even if you learned the rules a few years ago.

College costs: the core of the list

Paying for college remains the main purpose of a 529 plan. The IRS treats as qualified the expenses "required for the enrollment or attendance" of the beneficiary at a college, university, vocational school, or other eligible postsecondary institution, according to its tax topic on qualified tuition programs. In practice, that includes:

Tuition and required fees at an eligible school, generally one that participates in federal student aid programs.
Books, supplies, and equipment required for enrollment or attendance.
Computers, related equipment, software, and internet access used by the student while enrolled. The IRS 529 questions and answers note that equipment used primarily for entertainment does not count.
Room and board for a student enrolled at least half-time. For students living off campus, qualified costs are limited to the school's official cost-of-attendance allowance, as Saving for College explains.
Special needs services and equipment that a student with a disability needs to enroll and attend.

The room-and-board limit is where Bay Area families most often get caught. A student renting in an expensive college town can easily spend more than the school's published allowance, and the excess is not a qualified expense even though it is a real cost of attending. It is worth getting the allowance from the school's financial aid office before signing a lease.

Beyond the college years

Several newer categories let 529 money be used before or after a traditional degree. The largest is K-12 education. The One Big Beautiful Bill Act, signed in July 2025, expanded K-12 eligibility beyond tuition. For withdrawals after July 4, 2025, qualified K-12 expenses include curriculum materials and textbooks, online educational materials, tutoring by an unrelated tutor, standardized and Advanced Placement test fees, dual-enrollment fees, and educational therapies for students with disabilities, as Chase's summary of the new rules describes. The annual limit also doubled, and the IRS confirms that K-12 expenses are now "limited up to a total amount of $20,000 per year ($10,000 limit before Dec. 31, 2025)" in its qualified tuition program guidance.

Apprenticeships qualify as well. Fees, books, supplies, and equipment for apprenticeship programs registered with the U.S. Department of Labor are eligible, according to Saving for College's expense guide. The 2025 law added recognized postsecondary credential programs, such as industry certifications and licenses in the skilled trades. The my529 plan's summary of the legislation lists tuition, fees, books, supplies, and equipment, as well as "fees for testing or continuing education if required to obtain or maintain the credential."

Student loans can also be paid down. The IRS permits qualified education loan repayments up to a $10,000 lifetime limit. That limit applies separately to the beneficiary and to each of the beneficiary's siblings, so one account can help pay down loans for more than one child, as Saving for College notes.

Rolling unused money into a Roth IRA

The SECURE 2.0 Act created a path for savings that are not needed for school. A beneficiary can move up to $35,000 over a lifetime from a 529 plan into a Roth IRA in the beneficiary's own name. Fidelity's rollover overview summarizes the conditions: the 529 account must have been maintained for the beneficiary for at least 15 years, the amount moved must come from contributions made at least five years earlier, and each year's rollover cannot exceed the Roth IRA contribution limit, which is $7,500 for 2026 for savers under 50. For a family that overfunded an account, or whose child earned scholarships, this can turn a potential penalty into a head start on retirement. Changing the beneficiary to a sibling or another family member remains another way to put leftover funds to use.

What does not qualify, and what it costs

Many college-related costs fall outside the definition even when they feel essential. Transportation, health insurance, college application fees, and extracurricular activities do not qualify, according to Saving for College.

When a withdrawal exceeds qualified expenses, "a portion of the earnings is taxable," as the IRS puts it. Contributions come back without tax because they were made with after-tax dollars, but the earnings share of the excess is taxed as ordinary income and generally carries a 10% additional federal tax. The IRS technical guide to Section 529 lists the exceptions to the 10% tax, though not to the income tax: the beneficiary's death or disability, a tax-free scholarship (up to the scholarship amount), attendance at a U.S. military academy, and expenses that were used to claim the American Opportunity or Lifetime Learning credit.

California adds its own layer

California residents face additional rules. ScholarShare 529, the state's plan, notes that non-qualified withdrawals "may also be subject to an additional 2.5% California tax on earnings." California also has not adopted every federal expansion. According to the same ScholarShare FAQ, the earnings portion of K-12 withdrawals is subject to California income tax plus the 2.5% additional tax, and a 529-to-Roth IRA rollover "will be treated as a non-qualified withdrawal" for state purposes. Student loan repayments and registered apprenticeship costs, by contrast, can be withdrawn free of both federal and California income tax. For a California family, a use that is tax-free federally can still create a state tax bill.

Practical considerations

Families drawing on a 529 plan may want to keep the following in mind:

Match withdrawals to expenses in the same calendar year. A withdrawal in January for a bill paid in December can create a mismatch between the plan's Form 1099-Q and the school's Form 1098-T.
Coordinate with education credits. The IRS does not allow the same expenses to support two benefits under its no-double-benefit rule. Because the American Opportunity Tax Credit is worth up to $2,500 per student, as the IRS explains, families who qualify often pay about $4,000 of tuition from other funds and use 529 money for the rest.
Keep records. Invoices, receipts, and the school's cost-of-attendance figures support tax-free treatment if a withdrawal is ever questioned.
Account for scholarships. Withdrawing up to the amount of a tax-free scholarship avoids the 10% penalty, although the earnings are still subject to income tax.

The bottom line

A 529 plan is more flexible than it was a decade ago, covering everything from a young student's tutoring to a graduate's loan payments and, eventually, a Roth IRA. That flexibility comes with fine print, and the gap between federal and California treatment matters for families here. Planning withdrawals alongside the rest of a household's tax picture helps keep the benefit intact. This article is educational only and is not investment, tax, or legal advice; consult a qualified professional about your own circumstances.

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