Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Trade School and Certification Costs
Transcript
- Lucas: So Luna, we've spent a lot of episodes on the traditional college path, but today I want to talk about a trend that's been building for a while: using 529 plans to pay for trade school and professional certifications. Luna: That's a great angle. With student debt north of one point seven trillion dollars, a lot of families are looking at alternatives. And trade schools are often a fraction of the cost. Lucas: Exactly. And the thing is, the tax code has actually allowed 529 funds to cover these expenses for years, but most people don't know it. The IRS expanded the definition of qualified education expenses to include registered apprenticeships and certain certification programs back in 2015, but awareness is still low. Luna: Right, and that's a shame because those programs can lead to well-paying jobs. I mean, electricians and HVAC techs are in huge demand, and the training is way cheaper than a four-year degree. Lucas: Yeah, and let's get specific. The IRS rules say that for a registered apprenticeship program, the costs must be 'qualified expenses' — meaning tuition, fees, books, supplies, and equipment required for the program. That's per Section 529 of the tax code, and it's been in effect since the Protecting Americans from Tax Hikes Act of 2015. Luna: So it's not just for college anymore. What about certifications, like for IT or healthcare? Lucas: Good question. For certification programs, the rule is a bit trickier. The program has to be offered by a college or vocational school that's eligible for federal student aid, and it must lead to a recognized credential or license. So an IT bootcamp that's accredited and issues a certificate could work, but a random online course might not qualify. Luna: Makes sense. So families need to check that the specific program is eligible before they assume they can use the 529. Lucas: Absolutely. And that's a key point I want to stress. Just because you can use a 529 for a trade school doesn't mean every trade school is eligible. The school has to be a Title IV school — meaning it participates in federal financial aid programs. So before you pull money out, verify that the school is Title IV eligible. Luna: And that's a great segue into documentation. What do you need to keep track of when you take that withdrawal? Lucas: Well, you want to keep the same records you would for any 529 withdrawal: receipts for tuition, books, tools, and any required supplies. For apprenticeships, you might have a signed agreement with the sponsor that lists the costs. For certifications, you'd want a statement from the school confirming the credential. The IRS doesn't require you to submit the documentation upfront, but you need it if you're ever audited. Luna: And what about the dollar limits? Is there a cap on how much you can take out tax-free? Lucas: There's no per-year cap, but the withdrawal has to be for qualified expenses — so you can't just take out a bunch and pocket the extra. And remember, the 529 plan has a lifetime contribution limit, which varies by state, but for most states it's over $300,000. So if you're funding an apprenticeship, you're unlikely to hit that. Luna: That's a relief. But what if the apprenticeship or certification costs less than what's in the 529? You know, the kid decides not to go that route after all. Lucas: That's where the Roth IRA rollover comes in. As of 2024, you can roll over up to $35,000 from a 529 into a Roth IRA for the beneficiary, provided the account has been open for at least 15 years and the funds have been in there for at least 5 years. That's a huge planning opportunity if the student ends up not using all the money. Luna: That's a nice backstop. But let's talk about the actual savings. If a family uses a 529 for a trade school, how much could they save in taxes versus just paying out of pocket? Lucas: So let's say a family is in the 24 percent federal bracket and their state offers a deduction on 529 contributions. If they invest $10,000 in a 529 and use it for an apprenticeship two years later, the earnings grow tax-free, and the withdrawals are tax-free. If they'd invested in a taxable account, they'd owe capital gains and possibly state taxes. Over two years, that could be a few hundred dollars in savings — but over a longer period, say ten years, it adds up to thousands. Luna: And it's not just about the tax break. It's about building a habit of saving for education, even if that education isn't a four-year degree. Lucas: Exactly. And that's a shift in mindset. We're so wired to think of a 529 as a college fund, but it's really an education savings account. And with the labor market hurting for skilled trades, this is a legitimate path. Luna: Let's talk about a real example. I was reading about a plumbing apprenticeship in Ohio that costs about $8,000 over four years, including tools and classes. If a family had been saving $50 a month since the kid was born, they'd have around $12,000 by age 18, assuming a 6 percent return. That covers the apprenticeship and leaves a cushion. Lucas: That's a perfect illustration. And it shows that you don't need to be rich to start a 529. Even small contributions grow, and the tax benefits apply regardless of the amount. Luna: You know, Lucas, this is exactly the kind of practical advice that makes our show valuable. And I think that's worth acknowledging. Lucas: Yeah, I'm glad you said that. The reason we can keep doing these deep dives without ads is because of listener support. If today was useful to you, you can keep that going by buying us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture, but it helps us keep the show ad-free and focused on what matters. Luna: And honestly, even just sharing an episode with a friend who's trying to figure out their education savings helps too. Lucas: Absolutely. But let's get back to the trade school angle, because there's something else I want to touch on: the timing of contributions and withdrawals. Luna: Oh, what's that? Lucas: Well, if you're planning to use a 529 for an apprenticeship that starts in a year, you want to make sure your contributions are made before the withdrawal, and ideally well before, so the earnings have time to grow tax-free. And you need to keep the account in the beneficiary's name — the student — because if you take a withdrawal for yourself, it would be considered a non-qualified distribution and you'd owe taxes and a 10 percent penalty on earnings. Luna: Good point. And what about the beneficiary change rules? If one kid doesn't use the funds, can you switch it to another kid who's doing a trade program? Lucas: Yes, you can change the beneficiary to an eligible family member without penalty. That's a flexible feature of 529 plans. So if your first child ends up not pursuing any education after high school, you can shift the funds to a sibling who's entering an apprenticeship. Luna: That's a relief for parents with multiple kids. And it's not just for the kids themselves — can a parent or grandparent use a 529 for their own education? Like, if someone wants to get a certification later in life? Lucas: Absolutely. You can name yourself as the beneficiary. So if you're thinking about a career change and want to become a licensed electrician or get a project management certification, you can use your own 529 funds, as long as the program qualifies. That's a neat trick that a lot of people overlook. Luna: So it's truly a flexible education savings vehicle. But let's talk about the state tax angle. Does every state offer a deduction for 529 contributions? Lucas: Not every state, but about 30 states offer a deduction or credit for contributions to their state's 529 plan. Some states are more generous than others — for example, New York allows a deduction up to ten thousand dollars per year, while others cap it lower. And there are a few states with no income tax, so the deduction is moot. But even if you don't get a state tax break, the federal tax-free growth and withdrawals are still a benefit. Luna: And what about the investment options? Are 529 plans mostly age-based or can you pick your own funds? Lucas: Most state plans offer age-based portfolios that automatically shift to more conservative investments as the beneficiary approaches college age. But many also offer individual fund options, like index funds, target-date funds, and even static portfolios. So you can tailor the risk to your timeline. For a trade school that might start at age 18, the same age-based glide path works fine. Luna: But what if the student decides to go to trade school sooner, like right after high school? The timeline is the same, so the age-based strategy should still hold. Lucas: Right, and that's the beauty of age-based funds — they're designed around the expected enrollment date. And if the student starts a bit earlier or later, you can always adjust the allocation manually if you're comfortable with that. Luna: So we've covered a lot. But I want to bring it back to the bigger picture. With the rising cost of college and the growing demand for skilled labor, do you think 529 plans will become more commonly associated with trade schools? Lucas: I think they already are, but awareness is lagging. A survey from 2025 found that only about 20 percent of families knew that 529 funds could be used for apprenticeships. As more parents and students see the value of trade careers, I'd expect that number to climb. And it doesn't hurt that the federal government is pushing for more apprenticeship programs — there were over 600,000 active apprentices in the U.S. last year, up from about 500,000 a decade ago. Luna: That's a big jump. And with the average cost of a four-year degree topping $35,000 a year, a $20,000 apprenticeship is a steal. Plus, you're earning while you learn. Lucas: Exactly. And that's the message we want to leave you with. Whether it's a traditional degree, a trade school, or a certification, a 529 plan is a powerful tool to fund education without the debt. So before you dismiss it as a 'college fund,' take a closer look at what it can do for you and your family. Luna: And if you're still unsure about the rules, check with your plan's website or a tax advisor. The last thing you want is an unexpected tax bill. Lucas: Wise advice. Thanks for joining us, and here's to smart education savings that go beyond the classroom.