Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How 529 Plans Cover Student Housing Deposits
Transcript
- Lucas: So it's late August, and if you have a kid heading to campus in the next couple of weeks, you're probably staring at a housing deposit right now. And the question I keep hearing is: does my 529 plan cover that? Luna: I was literally just looking at my own. My daughter's deposit was due last week, and I had to double-check the rules. So what's the answer? Lucas: Short answer is yes — but there's a catch, and it's all in how you document it. The IRS treats room and board as a qualified expense, but only if the student is enrolled at least half-time. And a housing deposit, whether it's for a dorm or an off-campus apartment, counts as part of that room and board cost. But you need to keep the receipt, because the IRS can ask for proof. Luna: Before we go deeper — and I know this might sound a little off-topic, but it's actually exactly why we can do these episodes — a few listeners have asked how we keep this show ad-free. The honest truth is, a small group of you chip in monthly through buy me a coffee dot com slash fexingo, and that literally pays for our time and production. So if you've gotten value from these conversations, that's the way to keep it going. No pressure, just a real thanks. Lucas: Yeah, and it genuinely makes a difference. We get to spend the extra hour digging into the IRS rules instead of reading ad copy. But back to the deposit — let me give you a concrete example. Say your kid's state school charges a one-time $1,200 housing deposit. That's a qualified expense, so you can pull up to that amount from the 529 tax-free, as long as it's part of the total room and board cost for the academic year. Luna: So the deposit is really just a prepayment of rent, in a way. But what if the deposit is refundable? Like, if your kid moves out at the end of the year and gets it back? Lucas: That's the nuance. If the deposit is refundable and it actually gets refunded, then the original withdrawal from the 529 could become taxable. The IRS treats it like a return of unused funds. So the safe move is to only withdraw the deposit amount if you're fairly confident it won't come back. If it does, you can always put the money back into the 529 within 60 days to avoid the tax hit. Luna: That's a good tip. And what about off-campus apartments? The rules there are a little different, right? Lucas: Right. For off-campus housing, the qualified room and board amount is capped at the school's published cost of attendance for room and board. So if your kid rents a place that costs more than the school's estimate, you can only withdraw up to that published number. Anything above that is not a qualified expense. So let's say the school says $12,000 for room and board, but the apartment costs $14,000. You can only use $12,000 from the 529 tax-free. Luna: So the deposit on that off-campus apartment — is that also capped at the same limit? Or can you treat it separately? Lucas: No, it's all part of that same cap. The deposit is just one piece of the total room and board pie. So if the deposit is $2,000 and it's on that $14,000 apartment, you'd still be limited by the $12,000 published amount. The key is to track all your housing costs — deposit, first month's rent, utilities if they're required — and make sure they add up to no more than the school's number. Luna: Got it. And what about application fees for housing? Like, some schools charge a fee just to apply for on-campus housing. Is that covered? Lucas: That's a gray area. The IRS doesn't specifically list housing application fees as a qualified expense. But if it's required to secure housing, you could argue it's part of room and board. However, to be safe, I'd treat it as a non-qualified expense and just pay it out of pocket. The risk isn't worth the tax headache for a $50 fee. Luna: That makes sense. So the main thing is to keep every receipt. Do you recommend keeping a separate folder or just a digital scan? Lucas: Digital is fine. Save the email confirmation, the bank statement showing the payment, and any lease or housing contract. The IRS doesn't require a specific form, but if you're audited, you need to show that the withdrawal was for a qualified expense. I'd also note in your own records which school year the deposit covers, because that ties it to the enrollment period. Luna: And what if your child is studying abroad for a semester? Does the housing deposit over there count the same? Lucas: We actually covered study abroad in an earlier episode, but the short version is: yes, the same rules apply, but the cap is based on the study abroad program's published costs. So if the program lists room and board, you can use that number. Just make sure you have the program's cost breakdown in writing. Luna: Alright, so let's say a parent is listening and they're about to write that deposit check. What's the one thing you want them to remember? Lucas: Just two things: first, make sure your student is enrolled at least half-time for that semester. That's the trigger for room and board being qualified. And second, keep that receipt. The deposit is covered, but only if you can prove it. A simple photo on your phone is enough. And if the deposit comes back, put the money back into the 529 within 60 days to keep it tax-free. Luna: That's a clean checklist. And for those of you who are new to 529s, remember that every state has its own plan, but the federal rules are what we've been talking about. So check with your plan administrator if you're unsure. Lucas: Exactly. And if you're listening a bit later and the deposit deadline has passed, these rules apply to any housing payment throughout the year — monthly rent, utility deposits, even a winter break storage fee if it's required by the housing contract. It's all part of room and board. Luna: That's a good point. So this episode is really about the whole room and board category, not just the initial deposit. Lucas: Right. And the takeaway is that 529 plans are more flexible than most people think. As long as the expense is tied to the student's education and falls within the school's published costs, you're on solid ground. So go ahead and write that deposit check — but keep the receipt. Luna: Thanks for listening, everyone. We'll be back with more on college savings next week.