Study Abroad

March 20th, 2018 | Miller Advisors

Studying abroad with 529 plans

Consider whether this savings account can help cover your international education costs.

While in school, many students take the opportunity to study abroad in a foreign country. 529 accounts can be used to fund some expenses when studying abroad, but there are two main considerations to keep in mind:

  • Is the institution eligible?
  • What expenses are being paid?

Eligible Institutions

In order to use the assets in a 529 account for qualified study abroad expenses, the expenses must be associated with the attendance of an eligible institution. Often, study abroad costs are paid to U.S.-based schools that run the programs, but there are also over 400 schools outside of the U.S. that are considered eligible. You can look up eligible institutions by using the “School Code Search” on the Department of Education’s Federal Student Aid website. Note that you may need to choose “Foreign Country” as the state.

Qualified Expenses

When outside of the United States, 529 dollars are still limited to the same qualified higher education expenses as assets being used at a domestic school. Many schools charge an overall fee for the study abroad program but can provide an itemized breakdown of the total cost. Qualified expenses include tuition, fees, books, supplies, computers and equipment required for the enrollment or attendance of the beneficiary. Room and board is also often included if the student is enrolled at least half time – an allowance determined by the school in question. Notably missing from this list are travel expenses, meaning you can’t use 529 funds to pay for plane or train tickets travelling to and from your destination. For full details on qualified expenses, refer to the IRS’s Tax Benefits for Education publication.

Certain conditions may apply. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible education expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible education expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Investors should consider before investing whether the investor’s or the designated beneficiary’s home state offers state tax or other benefits only available for investments in such state’s 529 savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. 529 plans offered outside their resident state may not provide the same tax benefits as those offered within their state.

Source: Raymond James

Photo: iStock