Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using a 529 Plan for Your Child's Medical School Costs
Transcript
- Lucas: If you're a parent who started a 529 plan when your kid was born, you probably had college in mind. But what if that kid ends up going to medical school? Luna: That's a whole different cost picture. Four years of undergrad is one thing — four years of med school plus residency is another planet. Lucas: Exactly. And the thing is, a 529 plan can actually be a really good fit for graduate medical education. The IRS defines qualifying expenses broadly enough to cover a lot of what med school throws at you. Luna: So let's start with what qualifies. Tuition, obviously. But what about things like lab fees, or the cost of clinical rotations? Lucas: Yes — tuition, mandatory fees, books, supplies, and equipment required for enrollment. That includes things like a stethoscope, a white coat, maybe a laptop. Clinical rotation fees if they're charged by the school. Even certain health insurance premiums if the school requires it. Luna: And room and board? That's a big one for med students, especially during rotations where they might need temporary housing. Lucas: Absolutely. Room and board qualifies, but with the same rule as undergrad: the cost can't exceed what the school's official cost of attendance lists. So if your kid's med school says off-campus living is $18,000 a year, that's your cap. Luna: Right. So a 529 can cover a lot. But what about residency? You're not a student anymore, technically. You're an employee. Lucas: That's a key distinction. Residency is a paid position, so the costs associated with residency — moving expenses, licensing exam fees, interview travel — are not qualified expenses under a 529. So the plan is really for the four years of med school itself. Luna: Still, if you can cover a big chunk of med school tuition tax-free, that's huge. Let's talk numbers. What does a typical family need to save? Lucas: Let's use a concrete example. Say you start saving when your child is born. You put $400 a month into a 529, earning an average of 6 percent a year, compounded. After 18 years, you'd have roughly $155,000. Luna: And what's the average cost of four years of public medical school today? Lucas: For in-state tuition, fees, and living expenses, the Association of American Medical Colleges puts the four-year cost at around $260,000. So that $155,000 covers about 60 percent. Not bad. Luna: And private schools are much higher — more like $350,000 to $400,000. So you'd need to save more aggressively, or accept that the 529 covers a smaller piece. Lucas: Right. But here's the advantage: because medical school is so expensive, you're less likely to overfund the 529. The risk with any 529 is ending up with more than you need, and facing a penalty on the earnings when you withdraw for non-qualified expenses. Luna: But with med school costs being what they are, overfunding is a smaller worry. Unless your child doesn't go into medicine. Lucas: Exactly — and that's the big risk. If your kid decides not to go to medical school, you have options. You can change the beneficiary to another family member, like a sibling or even a cousin. Or you can use the money for other qualified education expenses, like grad school in a different field. Luna: But if there's no one else to use it, you could withdraw the earnings and pay income tax plus a 10 percent penalty on the growth. That hurts. Lucas: It does. But there's a newer workaround: the SECURE Act of 2019 and subsequent rules allow you to roll over up to $35,000 from a 529 into a Roth IRA for the beneficiary, as long as the account's been open for at least 15 years. That's a nice safety valve. Luna: So even if they don't go to med school, you can move money into their retirement account. That's a big improvement over a few years ago. Lucas: It really is. And it makes the 529 a more flexible tool for families who aren't sure their child will pursue an expensive graduate degree. Luna: Let's get into the specifics of what qualifies during med school. Can you use 529 funds for the MCAT prep course? Lucas: That's a gray area. The MCAT is a test required for admission, not for enrollment. So prep courses and the exam fee itself are generally not considered qualified expenses. Same for application fees or travel for interviews. Those happen before you're enrolled. Luna: But once you're in, you're good. What about medical licensing exams during med school? Like Step 1 and Step 2? Lucas: Those are trickier. The IRS hasn't given definitive guidance on licensing exams. Some tax professionals argue they're required for the degree, so they should qualify. Others say no. The safe approach is to pay for those out of pocket and use the 529 for clearly covered expenses. Luna: That's prudent. So the strategy is: use the 529 for tuition, room and board, books, and equipment. And for anything borderline, consult a tax advisor. Lucas: Exactly. And remember, the rules vary by state. Some states offer a state income tax deduction for 529 contributions, but there may be limits or recapture rules if you use the money for something other than in-state education. Luna: Let's shift to the timing. Med school is four years, but what about combined programs like MD/PhD? That can be seven or eight years. Lucas: Great point. Many MD/PhD programs offer full tuition waivers and stipends, so the 529 might not be needed for tuition. But you could still use it for living expenses that exceed the stipend, or for books and equipment. And if the program is tuition-free, you might want to save the 529 for something else. Luna: Or you could pass it down to a younger sibling. The flexibility is there. Lucas: Absolutely. Another angle: some families use a 529 to cover medical school costs while the student takes out federal loans for undergrad. That way, the loans — which may have lower interest rates and forgiveness options — are for the cheaper years, and the tax-free growth covers the expensive years. Luna: That's a smart sequencing strategy. And it aligns with the idea that a 529 is a long-term tool. You don't have to empty it by the time your kid is 22. You can hold it through age 30 or beyond if they're in a graduate program. Lucas: Right. There's no time limit on when the money has to be used, as long as it's for qualified education expenses at an eligible institution. Medical schools are eligible, so you can keep the 529 open until they finish. Luna: One more consideration: what if your child gets a scholarship? Many med schools offer merit or need-based aid. If that happens, you can withdraw up to the scholarship amount penalty-free from the 529, though you'll owe income tax on the earnings. Lucas: That's a key rule — the scholarship exception. It avoids the 10 percent penalty, but not the ordinary income tax. So it's not a perfect scenario, but it's better than a full non-qualified withdrawal. Luna: Alright, so let's sum up: a 529 plan can be a powerful vehicle for medical school savings, as long as you understand the eligible expenses and the risks if plans change. Lucas: And the earlier you start, the more compound growth works in your favor. Even $200 a month from birth can make a meaningful dent in future costs. Luna: If our money conversations have helped you think about a decision differently, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it's a small thing that makes a big difference for us. And it keeps the show ad-free. Luna: So back to the practical side: if you're considering a 529 for a future doctor, the key is to start early, contribute consistently, and review the qualified expense list annually. Lucas: And if you have a young child and you're already saving, you might want to adjust your target amount upward if you think med school is a real possibility. The good news is, even if they don't go, the Roth rollover option gives you a soft landing. Luna: That's a much better outcome than a decade ago. The rules have evolved to make 529s more versatile. Lucas: They have. And I think that's the big takeaway: a 529 isn't just for undergraduate tuition anymore. With proper planning, it can be a multi-purpose savings vehicle that adapts to your child's path. Luna: Even if that path leads to a white coat and a stethoscope. Lucas: Exactly. So take a look at your 529 plan, check your state's tax benefits, and if medical school is on the horizon, start crunching those numbers now.