Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Treat Room and Board Expenses
Transcript
- Lucas: If you're using a 529 plan to pay for your kid's dorm room or off-campus apartment, you need to know one number. Luna: I'm guessing it's not just the rent check. Lucas: Exactly. The number is the cost of attendance, or COA, that the school publishes. That's the ceiling for how much you can withdraw from a 529 plan for room and board without triggering taxes and penalties. And a lot of parents miss that. Luna: So you can't just pull out whatever the actual rent is? You're capped at what the school says? Lucas: Right. The IRS says room and board counts as a qualified expense, but only up to the greater of two things: the actual amount you paid for housing, or the school's official room and board allowance in its cost of attendance. In practice, that means if your student lives off campus and the school's budget for off-campus housing is twelve thousand dollars, but the real rent is fifteen thousand, you can only take twelve thousand out tax-free. Luna: What about the three thousand dollar gap? Could you still pay it with 529 money and just treat it as a non-qualified withdrawal? Lucas: You could, but then the earnings portion of that withdrawal would be subject to income tax plus a ten percent penalty. So you'd really want to avoid that. The smart move is to know the school's COA number before you take the distribution. Luna: Where do parents actually find that number? Is it buried in a financial aid letter? Lucas: Usually it's right on the school's website under the financial aid section — the cost of attendance page. Many schools publish separate budgets for on-campus, off-campus, and living at home. For off-campus, they often include rent, utilities, food, and even transportation. You want the line item that says 'room and board' or 'housing and meals.' Luna: Let's talk about on-campus versus off-campus. Does the rule work differently? Lucas: It does. For on-campus housing, the school's published room and board rate is basically always the cap — but it's usually straightforward because the school charges you that exact amount. So if the dorm and meal plan cost fourteen thousand, you can withdraw exactly fourteen thousand. Easy documentation. Luna: But off-campus, the school's budget might be way lower than what the market rents are. Lucas: Exactly. And the student has to be enrolled at least half-time, which is standard. But here's the trap: if the school doesn't publish an off-campus room and board budget — some smaller schools just use a single number — then you can only take the actual amount you paid for rent and food. Not a penny more. Luna: What if the student lives at home? Does that count? Lucas: It does, but the amount is usually smaller. The IRS allows room and board for a student living at home, up to the school's allowance for that situation. Typically, it's around three to five thousand dollars a year — just for food and incidental costs. No rent, obviously. Luna: So if your kid commutes, you can't just withdraw the fair market value of their bedroom. Lucas: Nope. And the IRS expects you to keep receipts. If you get audited, they want to see the lease, the utility bills, maybe even a meal plan receipt. For off-campus, the safest documentation is a signed lease and cancelled checks or bank transfers. For on-campus, the school's billing statement is usually enough. Luna: I've heard that some parents use 529 money to pay rent directly to their child, who then pays the landlord. Is that allowed? Lucas: It can be, but you need to be careful. The withdrawal should be made to the account owner — typically the parent — and then the parent pays the landlord. If the student is the beneficiary, they can receive the distribution directly, but only if they incur the expense. The IRS looks at who actually paid the rent. The key is to keep a paper trail showing the money went to housing costs. Luna: What about summer housing? If the student stays for an internship, does that count? Lucas: Only if the student is enrolled at least half-time during the summer term. If they're not taking classes, summer rent is not a qualified expense. That's a common surprise. Parents will pay for a summer sublet with 529 money and later realize it's a non-qualified withdrawal. Luna: Let's talk about meal plans specifically. Does the whole meal plan count, or just the academic year? Lucas: The meal plan counts as part of room and board if it's through the school. So if the university charges twelve thousand for a dorm and a five-meal-a-week plan, that entire twelve thousand is qualified. But if the student buys groceries and cooks, you need to keep receipts. The IRS allows food costs up to the school's allowance, but you can't just estimate. Luna: So if I'm a parent listening right now, what's the one thing I should do before making a 529 withdrawal for housing? Lucas: Go to the school's website, find the cost of attendance page, and write down the room and board number for the specific living situation your child has — on-campus, off-campus, or at home. Then withdraw only up to that amount. And keep every receipt. That's the whole game. Luna: And if the school doesn't publish a separate off-campus budget? Lucas: Then you're capped at the actual rent and food costs — and you better have documentation. Some parents use the school's standard budget as a safe harbor, but if the IRS asks, you need to prove the expense was real. Luna: Makes sense. I think a lot of people assume room and board is just automatically covered, but the cap is real. Lucas: It is. And it's one of the most common areas where people accidentally create a taxable event. A little planning upfront saves a lot of headache. Luna: You know, this kind of detailed planning is exactly why we do this show. And if you find these conversations helpful, there's a way to support it. Lucas: Yeah, we keep the show ad-free, and listener support is what makes that possible. If you'd like to chip in, you can do so at buy me a coffee dot com slash fexingo. Luna: Just a small way to keep these episodes coming. No pressure. Lucas: Exactly. So back to the housing rules — one more nuance. If your student has a scholarship, you can withdraw an equal amount from the 529 penalty-free, even if it's not a qualified expense. That includes room and board paid by the scholarship. But the earnings are still taxable. Luna: Right, that's the scholarship exception. So if the scholarship covers room and board, you can pull that money out without the ten percent penalty, but you'll owe income tax on the earnings. Lucas: Correct. And you need to keep a copy of the scholarship award letter. So really, documentation is the throughline here. Whether it's a lease, a meal plan receipt, or a scholarship letter, the IRS wants to see proof. Luna: Thanks, Lucas. I think our listeners now have a clear roadmap for handling 529 withdrawals for housing. Lucas: Glad to help. And remember, the cost of attendance number is your friend. Use it, keep receipts, and you'll be fine.