If you invest in a 529 college savings plan, investment income inside the plan won’t be taxed. Withdrawals are tax-free, too, if the money is used for "qualified higher education expenses."
What qualifies?
* Tuition, fees, books, supplies, and required equipment. That includes special needs services for students who need them.
* Certain room and board expenses.
Not all college costs qualify, though. Books and supplies that are not required do not qualify, for example. The same is true for transportation costs. Any money withdrawn from a 529 plan for a nonqualified cost might be subject to income tax and a 10 percent penalty.
For room and board, dorm fees qualify. If a student lives off-campus, rent and food costs qualify, up to the school’s published "cost of attendance." Suppose your child goes to a college where the published cost of room and board is $7,000. Up to $7,000 can be withdrawn from a 529 plan for room and board, tax-free, but withdrawals over $7,000 might be taxed and penalized.
