How to Use a 529 Plan to Pay for Your Own Education

I’ve previously covered 529 plans at length, but given the outrageous costs of post-secondary education these days (and the $1.77 trillion+ in student debt created by those costs), I thought it would be worth exploring the possibilities of using a 529 plan for your own educational expenses, for those readers who are thinking about furthering their education.

What is a 529 Plan?

To recap, a 529 plan is a tax-advantaged savings plan designed to encourage saving and investment for future education costs for a designated beneficiary. They are also referred to as “Qualified Tuition Programs” (QTPs), and the “529” moniker comes from the section (529) of the IRS tax code that they reside in.

There are two types of 529 plans – prepaid tuition and tax-advantaged savings plans. Very few states still have prepaid tuition plans, so I won’t spend time on them here. All 50 states, on the other hand, administer their own 529 savings plans. You are free to choose a 529 from any state, however, there may be advantages to choosing the one offered by your state of residence.

There are a few key benefits to 529 savings plans. First, some states allow tax deductions on part or all of contributions. Next, while contributions are not federal income tax deductible, 529 plan earnings on qualified withdrawals are federal income tax-free (given that they meet IRS criteria). In this regard, 529 savings plans are like Roth IRA’s, with the additional possible benefit of a state income tax deduction.

There are also some downsides and risks with 529 plans. More on those later.

529 plan for yourself

Can I Use a 529 Plan for Myself?

529 plans are typically thought of as a type of savings plan that parents establish for their children (or grandparents for grandchildren) to help build up savings for the future cost of education. While that is true (and most 529 plans are used to build education savings for a child beneficiary), 529 plans can also be used for your own educational expenses. And you can be any age when using one.

When you set up a 529 plan, you name one beneficiary. That beneficiary could be a child, another relative, a friend, or even yourself.  There are no income restrictions on either you, as the contributor, or the beneficiary. There are no limits to the number of plans that you can set up. And there are also no tax consequences if you change the designated beneficiary to another member of the family (including yourself).

What Can 529 Plans be Used for?

529 plans can be used to pay for all qualified education expenses, including tuition, room & board, mandatory fees, books, & computers at eligible post-secondary schools.

An eligible post-secondary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other post-secondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited post-secondary institutions meet this definition.

Should you Use a 529 Plan for Yourself?

There are some risks to using a 529 plan for yourself.

First, 529 plans are a type of investment account. And funds invested in non-cash options are subject to market losses. If you are contributing and investing for the short-term, your money-saving efforts could actually result in a loss.

Next, unlike with HSAs, if you are the beneficiary of a 529 plan, unused funds cannot be used for whatever you desire when you turn 65 (similar to an IRA), without penalty. In fact, with few exceptions, any unqualified distributions are subject to income tax on earnings plus an additional 10% penalty on those earnings.

Update: with the SECURE 2.0 legislation, money saved in a 529 college savings plan to be converted into a Roth individual retirement account tax-free after 15 years.

Before making 529 plan contributions for your own education expenses, it will likely be more beneficial for you to make sure that you and your spouse are first getting your maximum 401K matching funds from your employer. Even then, you’ll want to make sure that the funds are used for qualified education expenses for yourself (or to another designated beneficiary). If the funds are not used for educational expenses, you could be left with a hefty tax bill on withdrawals.

But, if 529 all funds are used for educational expenses, as planned for, then a 529 plan can be a solid tool in the toolbox to help address the high costs of furthering your education.

For additional information on 529 plans, refer to my prior article on them and to Chapter 8 of IRS Publication 970, Tax Benefits for Education.

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