Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Trade School and Apprenticeship Costs
Transcript
- Lucas: If you have a kid who's sixteen and already knows they want to be an electrician, not a history major, the 529 plan you've been saving into is still one of the best tools you can use. Luna: I think a lot of parents don't realize that. They assume a 529 is only for a four-year university. Lucas: Right, and that assumption probably costs families thousands in unnecessary penalties and taxes. The IRS has been pretty clear for a while now that qualified higher education expenses include trade school, apprenticeship programs, and vocational certifications. The key is that the program has to be eligible for federal student aid — meaning it has a Title IV code — and the school or program has to be accredited. Luna: So if my nephew signs up for a welding apprenticeship through the local community college, that counts? Lucas: Almost certainly yes — as long as the community college is accredited and the program leads to a certificate or credential. I looked up a specific example: the American Welding Society offers a certified welder program that runs about 40 weeks and costs around $8,200 in tuition and fees. That is a 529-qualified expense. Room and board? Also covered if the student is enrolled at least half-time. Luna: And that's for the student, not just the parent. I think people get confused about who the beneficiary can be. Lucas: Great point. The beneficiary can be the child, a grandchild, a sibling, even yourself. If you want to go back and learn HVAC repair at forty-five, your own 529 can pay for it. There's no age limit on qualified withdrawals. Luna: I actually met a woman last year who used her 529 to pay for a coding bootcamp — that one's always been a gray area, but the bootcamp was at a community college, so it qualified. Lucas: Bootcamps are a good test case. The IRS rule says the program must be 'eligible for federal financial assistance' under Title IV of the Higher Education Act. Most standalone coding bootcamps don't qualify, but when they're run through an accredited college, they do. So you have to check the school's Title IV code. Luna: What about apprenticeships that aren't through a school — like a union-sponsored electrician apprenticeship? Lucas: That's where the SECURE Act 2.0, passed in 2022 but with phased-in provisions, really helped. Starting in 2023, the definition of a qualified apprenticeship program was expanded to include programs registered with the Department of Labor or a state apprenticeship agency. So a union or employer-sponsored program that's dol registered counts. The student can use 529 funds for tuition, fees, books, supplies, and equipment required for the apprenticeship. Luna: So tools. That's huge. Electricians need thousands of dollars in tools their first year. Lucas: Exactly. I talked to a master electrician in Phoenix who said his first-year apprentices spend about $1,500 on basic tools — multimeter, wire strippers, screwdrivers, a hard hat. All of that can come out of a 529, as long as it's required by the program. You just need to keep receipts. Luna: And the tax treatment is the same as a university withdrawal? Earnings come out tax-free? Lucas: Correct. As long as the withdrawal is for a qualified expense, the earnings portion is federal-income-tax-free and usually state-tax-free too. If you take money out for a non-qualified expense, the earnings are taxed as ordinary income plus a 10 percent penalty. So the stakes are real. Luna: Let's talk about the penalty. I think some parents worry they'll make a mistake and get hit. Lucas: It's a valid worry, but the rules are actually more forgiving than people think. For example, if your child gets a scholarship, you can withdraw an equal amount penalty-free. Same if they attend a U.S. military academy. And if they die — which is terrible to think about — the beneficiary can be changed to a sibling without penalty. Luna: What about the Roth IRA rollover? That was a big change in the SECURE Act 2.0. Lucas: Right — starting in 2024, you can roll over up to $35,000 from a 529 to a Roth IRA in the beneficiary's name, as long as the 529 has been open for at least 15 years. That's a huge safety valve. If your kid decides they don't need all the 529 money for education, that excess can seed their retirement. But there are limits: the rollover counts against the annual IRA contribution limit, and the beneficiary must have earned income. Luna: That makes the 529 almost a no-brainer, even if you're not sure your kid will go to college. You can use it for trade school, and if they don't use it, you can roll it to a Roth. Lucas: Exactly. And there's also the option to change the beneficiary to another family member. So the money doesn't get stuck. That flexibility is why I think 529s are underrated for vocational paths. Luna: I want to ask about the employer side. Some apprenticeships are paid — the apprentice earns a wage. Does that affect 529 eligibility? Lucas: No, it doesn't. The apprentice can earn a salary and still use 529 funds for qualified expenses like tuition or tools. The wage is separate. In fact, the SECURE Act 2.0 also created a new tax credit for employers who sponsor apprenticeship programs — up to $1,000 per apprentice per year for five years. That's not directly a 529 thing, but it shows the government is trying to encourage these pathways. Luna: So the ecosystem is shifting. Parents who only think 'college or nothing' might miss this. Lucas: They might, and that's a shame. According to the Bureau of Labor Statistics, the median annual wage for electricians was about sixty thousand dollars in 2024, and the job outlook is growing faster than average. For plumbers, similar story. These are solid middle-class careers with zero student debt. Luna: And a lot of those programs take two years or less. So the 529 money goes further. Lucas: Much further. A four-year university can easily run $100,000 or more. A trade school diploma might cost $20,000 all in. If you saved $50,000 in a 529, you could cover the whole thing and still have leftover money to roll into a Roth IRA. That's a fantastic outcome. Luna: Before we move on, I want to touch on something — and this is a little meta. We talk about money strategies like this every week, and we don't run ads on these episodes. That's a deliberate choice. The production team keeps the lights on because listeners who find value occasionally chip in at buy me a coffee dot com slash fexingo. If our conversations have helped you think about a decision differently, that's where you can support the ad-free approach. Lucas: Yeah, it's a nice model. We don't interrupt the flow with sponsor reads, and the people who appreciate that can throw in a few bucks. Totally optional, but it makes a difference. Luna: Alright, back to trade schools. Lucas, what's the one thing you'd tell a parent who's on the fence about opening a 529 for their ten-year-old who loves fixing things? Lucas: Open it. Even if you only put in a few thousand dollars. You can always change the beneficiary later. And if the kid ends up at a university, great — the money works there too. But if they go the trade route, you'll be glad you saved in a vehicle that treats their path as 'higher education.' The tax benefits are the same either way. Luna: And state tax deductions. I know some states offer a deduction for 529 contributions. Does that apply regardless of what the money is used for? Lucas: Generally yes, as long as the withdrawal is qualified. But you have to check your specific state plan. Some states have recapture provisions — if you roll the money to another state's plan, they might claw back the deduction. So it's worth reading the fine print. Luna: What about using a 529 for a pre-apprenticeship program? Some are aimed at high school students. Lucas: If the program is offered by an accredited institution and leads to a credential, it should qualify. For example, many community colleges offer summer pre-apprenticeship programs in construction or manufacturing. Those are typically eligible. The key is always the Title IV eligibility. Luna: Let's talk about the documentation. If the IRS asks, what do you need to show? Lucas: You need to keep the receipts, the enrollment verification, and a statement from the program showing that the expenses are required. For tools, a receipt from the hardware store is fine. For tuition, a bill from the school. The 529 plan provider will also send you a Form 1099-Q at the end of the year showing the distribution, but you don't have to report the qualified part on your tax return — it's just informational. Luna: So it's not as scary as it sounds. Lucas: Not at all. I think the biggest obstacle is actually awareness. Most financial advisors still default to '529 equals college.' But the law has been broader for years, and the SECURE Act 2.0 made it even broader. The challenge is getting the word out. Luna: Alright, I'm convinced. I'm going to tell my nephew's parents to open a 529 this week. Lucas: Do it. And tell them to check if their state offers a deduction. In some states like New York or Michigan, you can deduct contributions up to ten thousand dollars per year. That's real savings. Luna: Great advice. Lucas, as always, thanks for walking through this. Lucas: My pleasure. Next time we can talk about using 529s for continuing education credits — that's another underused feature. Luna: That sounds like a good one. See you next week.