Investing in You: 529 education funds can be used for housing expenses

Is your college student living at home this year?

You can charge your kid rent, and be paid out of the 529 college-savings plan you set up years ago.

Most important: The student must be enrolled at least half-time in school.

According to accounting and tax experts, withdrawals from a 529 education fund can be used to cover housing expenses even if students continue living with their parents while attending college.

Some experts, such as Rosalind Sutch of Drucker & Scaccetti Certified Public Accountants/Business Advisors in Center City, say it's crucial to be careful about how you account for those expenses out of a 529 plan.

Say your Drexel University student's dorm and meal plan cost $19,000 a year. That's the maximum you can withdraw from the 529 plan for living expenses.

"If they're living in off-campus apartments, you can withdraw that amount as well from a 529 plan," says David L. Zalles, an accountant in Blue Bell.

If the student is living at home with you, the 529 plan can still pay equivalent room-and-board costs, but the amount is capped at whatever the college allots for commuter students - say, $7,500 per year.

"Each college will tell you what that amount should be on their website," Zalles says.

To be a complete stickler, the student should actually pay rent directly to his or her parents, Sutch says.

Zalles disagrees. These 529 savings plans are quite flexible, he says.

"Regulations only state that you are allowed to withdraw the amount from the 529 as a 'qualified expense' up to the amount designated by the university," he explains. "Nowhere does it state that it must be paid by the student to the parent."

What else are qualifying higher-education expenses?

Tuition, some fees, books, supplies, and equipment.

What about a computer?

Yes, but only if the school absolutely requires one, Zalles says. And most don't.

Only a few hundred U.S. colleges deem computers necessities. The vast majority do not, based on concerns about low-income students. Instead, to level the playing field, colleges opt to provide computer labs on campus.

Most of the time, a computer is not a qualified expense under a 529 plan.

"Congress should remove this ridiculous restriction," Zalles says.

What is not considered a qualified education expense?

Nonacademic fees, such as athletic dues, student activity dues, transportation, and parking.

Keep your receipts. There is a whole list of educational tax benefits - some are deductions, and some are credits.

College tuition and fees are an above-the-line deduction on federal taxes. That means you do not have to itemize your deductions for up to $4,000 of college tuition and related expenses for yourself, a spouse, or a dependent, according to SavingForCollege.com.

Then there are tax credits, like the American Opportunity Credit.

Through 2017, a parent can claim the AOC for a dependent child's college tuition and related expenses, including course materials such as books, for a maximum $2,500 annual tax credit per child.

Students have to attend a degree program at least half-time, and you can't claim the credit for more than four tax years for any one student.

You can claim the lifetime learning tax credit for combined tuition and fees for yourself, your spouse, and your dependent children, for a tax credit up to $2,000.

Good news? There's no requirement that a student must be studying toward a degree or even be enrolled at least half-time. And there's no limit on the number of years the credit can be taken.

Bad news? The credits don't overlap. Claim the American opportunity credit, and you can't claim the lifetime learning credit in the same tax year.

Option IRA. You can pay educational expenses - without the 10 percent early-withdrawal penalty - out of an individual retirement account.

Penalties are waived when Roth IRAs and traditional IRAs are used to pay the qualified postsecondary education costs of yourself, your spouse, your children, or your grandchildren.

Taxes may still be due on the withdrawals, however.

For more information on tax credits and incentives for education, see IRS Publication 970, Tax Benefits for Higher Education, available at the government website (http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center).

SavingForCollege.com has a free guide, downloadable for Kindle, Nook, iBook, eInk, or other devices (.pdf) at (http://www.SavingforCollege.com/family-guide).

What is a 529 plan? A handy, creative way to save for college expenses by investing in a special fund. You can invest in any state's 529 fund. Check with your broker or with your state for details.

Pennsylvania's plan is managed by the state Treasury Department. The record-keeper is Upromise Investment Advisors. The underlying money manager is Vanguard. The program features age-based and other investment options, including a socially responsible equity portfolio, using Vanguard-managed portfolios.

New Jersey has two 529 savings programs, both managed by Franklin Templeton Investments.EndText