08 May Can 529 plans be used for trade school?

Q. Can 529s be used for trade schools?
— Planning

A. Yes they can — as long as the trade school qualifies.

First, though, a little background on 529 plans.

These are tax-advantaged accounts offered by a state or educational institution. The account is established by the owner, who then names a beneficiary for the account.

The main advantage of a 529 plan are the earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

Contributions to a 529 plan, however, are not tax deductible on your federal return. Some states offer a deduction, but New Jersey isn’t one of them.

Now to your specific question about whether a 529 plan can be used for a trade school.

Yes it can, Maye said, as long as it’s considered an eligible educational institution.

Per the IRS: “An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.”

So, Maye said, if the trade school is eligible to participate in a student aid program administered by the U.S. Dept of Education, then 529 funds can be withdrawn and used tax-free for the trade school tuition.

Maye said you should remember that any 529 distributions taken for non-educational purposes are considered non-qualified distributions.

“With a non-qualified distribution, the growth or earnings in the 529 account are subject to ordinary income tax when withdrawn,” he said. “Rather than take a non-qualified 529 distribution the account owner may want to change the designated beneficiary. For example, they could change the beneficiary to another child who will have eligible expenses to preserve the 529s tax benefits.”

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This story was first published in May 2017.