Types

• There are two distinct types of 529 plans: college savings plans and prepaid tuition plans. According to the U.S. Securities and Exchange Commission, prepaid tuition 529 plans can be used to purchase education credits at a particular college or university. College savings 529 plans are used to save for future higher education expenses at eligible institutions. Unlike a prepaid tuition plan, a 529 savings plan does not lock in current tuition rates.
  
  

Eligibility

• Several eligibility criteria must be met prior to taking a 529 plan withdrawal. The Internal Revenue Service (IRS) requires students be enrolled on at least a half-time basis to qualify. Students must also attend an eligible educational institution. This includes public, private, nonprofit, and proprietary colleges, universities, technical schools, and vocational schools. Post-secondary schools must be eligible to participate in federal student aid programs to qualify. Funds can be used to pay for undergraduate or graduate education programs.
  
  

Qualified Withdrawals

• 529 plan withdrawals may be used to fund qualified education expenses only in order to avoid a tax penalty. According to the IRS, a qualified education expense includes tuition, books, fees, and room and board. According to Kiplinger, off-campus housing expenses can also be covered by 529 plan funds up to the amount that a school allows in its cost of attendance for federal financial aid purposes.
  
  

Benefits

• The primary benefit of using 529 plan money to fund education expenses is that qualified withdrawals are tax-free. You can invest in any state's 529 savings plan, regardless of residency. 529 savings plan withdrawals can be used at virtually any college or university in the United States and at qualifying schools outside the U.S. Parents who open 529 plans in their own names, on behalf of their children, have a minimal effect on their children's financial aid eligibility.
  
  

Considerations

• If you withdraw funds in excess of your qualified education expenses or for a purpose other than education, the IRS will assess a 10 percent withdrawal penalty on these funds. If earnings are included in the total, you will have to pay regular income tax on them as well. Your tax liability for 529 plan withdrawals may also be affected if you plan to claim federal education credits on your taxes or if your child receives scholarship funding.