You cannot use 529 plan funds to pay for travel and transportation costs. This applies to all travel and transportation costs, including transportation to and from the college, such as car payments, repairs, and gasoline. Travel for international study and study abroad programs, such as flights, train tickets, and taxis, are also not considered 529 eligible expenses.
If 529 plan withdrawals are used for these transportation expenses, they will be considered non-qualified expenses that don’t allow using 529 plan funds to cover the costs. The earnings portion of a distribution from a 529 used to pay for travel and transportation expenses will be considered a non-qualified distribution.
Non-qualified distributions are taxable at the beneficiary’s rate, plus a 10% federal tax penalty and recapture of state income tax benefits attributable to the distribution.
However, there may be an exception if the university charges travel and transportation costs as part of a comprehensive tuition fee or if the fee is identified as a fee that is “required for enrollment or attendance” at the college.
What’s considered the cost of attendance?
A college’s official cost of attendance, as defined in the Higher Education Act of 1965, includes an allowance for transportation expenses.
However, the definition of qualified higher education expenses in the Internal Revenue Code of 1986 is different. It does not include transportation expenses, miscellaneous personal expenses, dependent care costs, loan and licensing fees, and room and board limited to students enrolled on at least a half-time basis.
529 qualified expenses and transportation
Qualified education expenses are limited to tuition, fees, books, supplies, equipment, special needs services, computers (including peripherals, software, and internet access), and room and board if enrolled at least half-time.
Students can ask their educational institution to increase the cost of attendance to reflect their actual travel and transportation costs. However, the family will still be unable to distribute tax-free from a 529 plan to pay for the travel expenses. Increasing the cost of attendance may enable the students and parents to borrow more federal education loans to cover the costs.
Some colleges have emergency aid funds that may cover the cost of repairs to the student’s car if the student is a low-income commuter student. But, emergency aid funds will generally not cover the cost of routine travel costs, except perhaps the cost of public transportation.
You may also be able to get grants or scholarships to cover these types of expenses. Some of these funding sources have fewer restrictions when spending the funds, so it may be possible to cover transportation expenses this way.
