Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Using Your 529 Plan for Your Child's Medical Residency Costs
Transcript
- Lucas: If your child is heading to medical school, there's a good chance you've thought about using a 529 plan for tuition, maybe even for a stethoscope or a laptop. But what about the four years after med school — residency? Luna: Residency — that grueling period where new doctors work eighty-hour weeks for a stipend that barely covers rent. Can a 529 help there? Lucas: It can, but it's one of the lesser-known provisions in the tax code. Under the IRS rules, a 529 plan can be used for qualified expenses at an eligible educational institution — and that includes hospitals that offer residency programs. Luna: So the hospital has to be an eligible institution? I didn't think teaching hospitals were on the list. Lucas: Many are. The key is that the hospital must be eligible to participate in federal student aid programs, which most teaching hospitals affiliated with a university are. So if your child matches into a residency at, say, Cleveland Clinic or Massachusetts General, those are eligible. Luna: And what counts as a qualified expense? Tuition is obvious, but residency doesn't really have tuition. Lucas: Right, residency is more like a paid job. But there are still costs: licensing fees, board exam fees, travel for interviews, relocation expenses — all of those can be covered if they're required for enrollment at the residency program. Luna: Wait — relocation? I moved across the country for my first job and that was not cheap. So you're saying I could have used a 529 for that? Lucas: If the move is for the residency program, and the program is at an eligible institution, then yes, reasonable relocation costs count. That includes moving trucks, temporary housing, even travel for you and your family. Luna: That's huge. I know a family in Ohio who did exactly this. Their daughter went to med school at Ohio State, and they had leftover funds in the 529. They redirected it toward her internal medicine residency at the same hospital system. Lucas: Great example. They used the 529 to pay for her state medical licensing fees — about six hundred dollars in Ohio — and for her USMLE Step 3 board exam, which is required during residency. That exam alone costs over a thousand dollars now. Luna: And they avoided the ten percent penalty on non-qualified withdrawals. If they had just cashed out the 529, they'd have lost a chunk to taxes. Lucas: Exactly. The earnings portion would be taxed as ordinary income plus that ten percent penalty. For that family, they estimated they saved around eighteen thousand dollars over four years by using the 529 for residency expenses instead of withdrawing early. Luna: So what about the residency stipend itself? If the resident gets a paycheck, can that be a problem? Lucas: No, the stipend doesn't disqualify the expenses. The key is that the expenses are incurred as part of the residency program. The stipend is just income — it doesn't affect the 529 distribution at all. Luna: But you have to keep receipts, right? The IRS is going to want to see that the money went to qualified expenses. Lucas: Absolutely. Save the receipts for licensing fees, exam fees, relocation costs. If you get audited, you need to show that the expense was required for the residency program. Luna: One thing I've wondered: what if the 529 is overfunded? Like, what if your child doesn't use all the money by the end of residency? Lucas: That's a real risk. But you have options. You can change the beneficiary to another family member — say, a sibling or even a cousin. Or you can leave the money in the account for future education expenses, like a fellowship or continuing medical education. Luna: Or you could take a non-qualified withdrawal and just pay the tax and penalty. But that stings. Lucas: It does. That's why it's smart to plan ahead. If you know your child is heading to medical school, you might aim to fund the 529 conservatively and use it for both med school and residency. That way, you're less likely to overfund. Luna: And residency is typically three to seven years, so that's a long runway to use the funds. Lucas: Right. Internal medicine is three years, surgery is five, neurosurgery can be seven. That's a lot of potential qualified expenses. Luna: I want to circle back to something you mentioned earlier — what about board exam fees? Like the USMLE or specialty boards? Lucas: Those are qualified if they're required for the residency program. The USMLE Step 3 is almost always required during the first year of residency. Specialty board exams, like the Internal Medicine Board Exam, are also required for certification. So yes, those are fair game. Luna: What about prep courses? Like Kaplan or UWorld? Lucas: That's a gray area. The IRS says the expense must be required for enrollment or attendance at the eligible institution. A prep course might not be required — it's optional. So I'd be cautious. Better to use that money from your own pocket and save the 529 for clearly qualified expenses. Luna: Good advice. Let's talk about the practical side. How does the family actually access the money? Do they write a check to the hospital? Lucas: Typically, you request a distribution from the 529 plan, and the money goes to the account owner — usually the parent. Then you use it to pay the expense. Some plans allow direct payment to the institution, but it's usually easier to reimburse yourself after paying the bill. Luna: And you need to document that the payment was made in the same calendar year as the distribution? Lucas: That's the general rule. You want the distribution and the expense to be in the same tax year. It's best to pay the expense first, then reimburse yourself shortly after. Luna: This is really valuable for families with kids in medical training. I know a lot of people think the 529 is just for undergrad. Lucas: Exactly. And it's not just residency. You can also use it for fellowship programs, which are even longer. So if your child is going into cardiology or oncology, that's additional years of training. Luna: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making episodes like this possible. No ads, just listeners who find it useful. Lucas: Yeah, it's a small group, but it keeps the show ad-free and independent. If our conversations about 529 strategies have helped you think about funding differently, that's the reason we do it. Luna: And we're back to residency. One more question: can you use a 529 for a residency program in another country? Lucas: Only if the foreign institution is eligible to participate in the federal student aid program. Most foreign medical schools are not, so it's unlikely. But some Canadian and UK institutions might qualify. You'd have to check the Department of Education's list. Luna: So the safe bet is to stick with U.S. programs. Lucas: For now, yes. The IRS hasn't expanded the definition much. But there's been talk about extending 529 benefits to all graduate medical education, including residencies at non-hospital clinics. We'll see. Luna: It's worth watching. For now, if you have a child in med school or residency, this is a concrete way to stretch your 529 dollars. Lucas: I'd love to see the IRS issue clearer guidance on prep courses and travel expenses. That would reduce a lot of uncertainty for families. Luna: Agreed. Until then, keep those receipts and consult a tax professional if you're unsure. Lucas: Good advice. So, if you're funding a 529 for a future doctor, remember: it doesn't stop at med school graduation. Luna: And that's a wrap for today. Thanks for listening.