Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Apprenticeship Programs
Transcript
- Lucas: So, Luna, we've spent a lot of episodes talking about 529 plans for college expenses, but there's a whole other world that a lot of families don't realize these accounts can cover now, and it's not a four-year degree. I'm talking about apprenticeship programs. Luna: Oh, that's a good one. And I feel like with the push toward skilled trades, this is a really timely topic. What's the deal with 529s and apprenticeships? Lucas: Well, it goes back to the SECURE Act from 2019. Before that, 529 plans were pretty much limited to college, university, and some K-12 tuition. But the SECURE Act expanded qualified expenses to include registered apprenticeships, which is a huge deal for families who are looking at trade careers. Luna: So what exactly counts as a qualified expense for an apprenticeship? Like, can you just pay the stipend or something? Lucas: No, it's not that broad. The expenses have to be for a registered apprenticeship program, which is one certified by the Department of Labor or a state agency. And the qualified expenses include things like tuition, fees, and equipment that are required for the program. So think tools, textbooks, safety gear, that kind of thing. Luna: So a welding student might buy their own helmet and gloves, and that's a qualified expense? That's pretty cool. Lucas: Exactly. And it's not just the trades, either. Registered apprenticeships exist in fields like healthcare, information technology, even advanced manufacturing. So the range is actually pretty broad. Luna: But wait, does the apprenticeship have to be at a college or university? Or can it be through a union or an employer? Lucas: That's the beauty of it. It can be through a union, an employer, or an industry association, as long as it's a registered program. So for example, the electrician's union in a city might run a registered apprenticeship, and that would qualify. Luna: So, Lucas, this is a show about saving for college, and we've been talking about apprenticeships for a bit. I know we have a small group of listeners who chip in monthly through buy me a coffee dot com slash fexingo, and they're the reason we can keep making these episodes without ads. If this conversation is hitting close to home for you, that's one way to support the show. Lucas: Yeah, it's honestly a big deal for us. A handful of listeners keep the whole thing going, and we're really grateful. But back to apprenticeships, because there's a lot of nuance here. Luna: So, what about the tools and equipment? Is there a limit on what you can buy with 529 funds? Lucas: The IRS hasn't set a specific dollar limit for apprenticeship equipment, but the equipment has to be required for the program. So you can't just buy an expensive laptop if the program doesn't require it. But if a welding program mandates a specific brand of torch, that's a qualified expense. Luna: And what about the stipend or the wages that apprentices earn? Can you use 529 money to cover living expenses while you're in the program? Lucas: No, that's a common misconception. The stipend or wages you earn are not qualified expenses. You can't use 529 funds to replace lost income or to pay for rent or food. Those are considered personal expenses, not education expenses. Luna: So, I have to ask, what about the certification exams? Like, does the IRS consider those qualified? Lucas: Interesting you bring that up. Certification exams can be qualified if they're required for the apprenticeship program. So if you're in an electrical apprenticeship and you need to pass a journeyman exam to advance, the exam fee would be a qualified expense. Luna: That's good to know. So, what about the paperwork? I imagine there's some documentation needed to avoid an IRS headache. Lucas: Absolutely. You need to keep detailed records of the expenses, including the name of the apprenticeship program, proof that it's registered, and receipts for any equipment or fees. And when you take a withdrawal from the 529, you'll want to make sure it's coded as a qualified education expense, so you avoid the 10 percent penalty on non-qualified withdrawals. Luna: So, if you're a parent and your kid decides to go into a trade, this is a legit way to use that 529 you've been saving. Are there any state-specific quirks to watch out for? Lucas: That's a great point. The SECURE Act made apprenticeship expenses qualified at the federal level, but not every state automatically conforms. Some states might treat 529 withdrawals for apprenticeships as non-qualified for state tax purposes. So you really need to check your own state's rules before you spend the money. Luna: And there's also the issue of account ownership, right? Like, if the beneficiary is the apprentice, can you just pay for their tools from their 529? Lucas: Yes, as long as the beneficiary is the apprentice, you can use the funds for their qualified expenses. So if you have a 529 for your child and they become an apprentice, you can take distributions to cover their tools and fees. Just make sure the expense is truly required by the program. Luna: So, let's say I have a 529 for my niece, and she's doing a carpentry apprenticeship. Can I use my account to buy her a hammer and a tool belt? Lucas: Yes, if you're the account owner and your niece is the beneficiary. As long as the hammer and tool belt are required for the program, it's a qualified expense. But you'd need to keep the receipts and maybe a note from the program confirming the requirements. Luna: That makes sense. And what about the timing? Can you take the distribution before the apprenticeship starts, say, to buy the tools upfront? Lucas: You can, as long as the expense is incurred in the same tax year as the distribution. So if you buy the tools in August for a program that starts in September, that should be fine. But you want to avoid taking a distribution in, say, December for equipment you'll buy in January of the next year, because the IRS might see that as a non-qualified distribution. Luna: So, it's all about matching the timing and keeping good records. That's a solid tip. Lucas: And one more thing, if the apprenticeship doesn't work out, you can always change the beneficiary to another family member, or even yourself, if you want to go back to school. So it's not a sunk cost. Luna: That's reassuring. So, what's the bottom line for someone considering this route? Is it worth using a 529 for an apprenticeship? Lucas: I think it can be, especially if you've been saving for a while and your child decides on a trade. You get tax-deferred growth and tax-free withdrawals for qualified expenses, which is a big advantage. But you need to be careful about the program being registered and the expenses being truly required. Luna: And I'd add that it's a great way to support a career path that doesn't require a four-year degree, which is a smart financial move for some families. Lucas: Exactly. And with the cost of college soaring, apprenticeships offer a debt-free path to a solid career, and 529 plans can help make that even more affordable. Luna: So, if you're a parent listening and your kid is into welding or plumbing, don't overlook your 529. It might be more flexible than you thought. Lucas: Absolutely. And if you want to dive deeper into the specific rules for your state, a quick search for 'your state 529 apprenticeship' should get you the details. That's probably a good place to start. Luna: Great advice. Thanks for breaking this down, Lucas. Lucas: Anytime, Luna. And hey, if you're thinking about a trade career, it's worth talking to a financial advisor to see how a 529 fits into your overall plan.