Saving for a child’s college education is an important financial goal for many parents. In the U.S., 529 plans are a popular and tax-advantaged way of saving for college. However, there may be some questions and considerations when your child wants to use their 529 funds to study abroad. In this blog, we discuss which foreign universities are 529 eligible, and other considerations you should take into account.
Can a 529 plan be used for study abroad?
Yes, a 529 plan can be used to study abroad. 529 funds can be used to pay for qualified higher education expenses at eligible international schools or universities. They cannot be used to cover day-to-day expenses or travel costs. It’s also important the school and the withdrawals meet IRS rules to avoid taxes and penalties.
Which foreign universities are 529 eligible?
For an educational institution to be eligible, it must participate in the U.S. Department of Education’s federal student aid programs. Many accredited colleges, universities, and vocational schools worldwide meet this requirement. However, you must confirm the eligibility of the specific institution where you plan to enroll.
What college expenses are 529 eligible for studying abroad?
Make sure that you are familiar with the rules regarding 529 plans before your child puts down a deposit on an expensive study abroad program. Some of the college expenses that are covered for studying abroad include:
- Tuition and fees.
- Books, textbooks, supplies, and equipment.
- Room and board (the 529 beneficiary must be enrolled at least part-time and their eligible room and board can’t exceed the school’s published cost of attendance estimate for those expenses.)
Some of the college expenses are not covered for studying overseas include:
- International health insurance and medical costs
- Travel expenses
- Basic living expenses
- International cell phone costs
- Sports and activity fees
- Foreign transaction fees
What happens if my child uses their 529 funds for nonqualified expenses?
If your child uses their 529 funds to pay for nonqualified expenses, they will need to pay income tax on those withdrawals and a 10% penalty on the earnings portion of the withdrawals. They may also be subject to taxes and penalties levied by the state in which the account is held. Additionally, any withdrawals made must be in the same calendar year that the qualified expenses are paid.
There are rare exceptions to withdrawing without penalty, such as veteran’s assistance, attending a U.S. military academy, disability, or death.
Can my child use their 529 to live off campus if studying abroad?
Yes, as long as they are enrolled at least half-time. However, the cost of living off-campus must not exceed that of the published room and board at their school. If it is more, then they will need to cover that difference.
If they decide to stay abroad over summer break without taking any classes, they likely cannot use their 529 funds to pay for room and board. This can be so even if those were qualified expenses during the academic year.
What are the tax implications of using a 529 plan for international schools?
It is important to understand the tax implications of using a 529 plan for overseas education. While qualified distributions from 529 plans used for eligible expenses are generally tax-free at the federal level, state tax rules may vary. Some states may impose limitations or restrictions on using 529 funds for foreign institutions.
It’s best to consult with a tax professional, financial advisor, or 529 plan administrator. They can provide specific guidance on your state’s regulations to ensure that there aren’t any unexpected tax consequences.
Can you continue to invest in a 529 plan while living overseas?
You can continue to invest in 529 plans while living abroad. Many 529 plans offer state tax deductions, but if you aren’t filing state tax returns then you won’t receive this benefit.
Using 529 plans to study abroad
529 plans can generally be used for qualified higher education expenses at eligible universities abroad. However, it is essential to verify the eligibility of the specific institution and consider any applicable tax implications and fees associated with overseas expenses. It’s essential to understand the regulations and plan accordingly to ensure that your child can make the most of their 529 savings while pursuing education internationally.
