Q: Can I use money tax-free from a 529 college-savings plan to pay for continuing education? Or do I have to be enrolled in a college degree or certificate program?
A: As long as you are taking the course at an eligible institution, the cost of tuition, fees, required books and software can be withdrawn tax-free from the 529—even if you aren’t in a degree or certificate program.
Eligible institutions are accredited colleges, universities, vocational schools and other postsecondary educational institutions that can participate in a student aid program administered by the U.S. Department of Education. You can look up eligible institutions by using the Federal School Code Search tool at the FAFSA.gov site.
“There are nearly 4,000 U.S. institutions that qualify—including four-year, two-year, technical, graduate, professional, public and private—along with some outside of the U.S.,” says James DiUlio, director of the Wisconsin 529 College Savings Program and chairman of the executive board of the National College Savings Plan Network. (You can find links to each state’s plans at CollegeSavings.org.)
Continuing education needed to maintain a professional license may also be eligible, depending on the institution where you take the course. For example, eligible institutions offer many continuing education programs for librarians, teachers, principals, insurance professionals, and some emergency medical technicians and medical occupations, says DiUlio. (You must be enrolled at least half-time to withdraw 529 money tax-free for room and board, however.)
Using a 529 for continuing education can be particularly helpful for parents who have 529 money left over after their children finish college, or if their kids don’t end up going to college or technical school, says DiUlio. “You can transfer the account’s beneficiary to the person taking continuing education, including yourself,” he says.
In states that give residents an income tax deduction for contributing to a college-savings plan, some people put money in a 529 account to pay for continuing education classes they plan to take soon, DiUlio adds. This way, they can get the tax break even though they won’t be keeping the money in the account for long. You can find out your state’s rules for deducting 529 contributions and whether you need to keep the money in the account for a certain time period at Savingforcollege.com.
If you withdraw money from a 529 for ineligible expenses, you’ll generally have to pay taxes and a 10% penalty on the earnings (but not on the contributions). A portion of each withdrawal is considered to be from principal, and a portion comes from earnings, based on the ratio for your total 529 balance. See the “Qualified Tuition Program” section of IRS Publication 970 for worksheets to help you calculate the taxable amount if you take ineligible withdrawals.
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