Which School Expenses are Covered by 529 Plan?

Dear Dr. Don,

I know that funds from a 529 plan can be used to pay for the cost of graduate school. Can the funds also be used to pay for graduate school application fees? How can I find out more about these plans?

Thanks,

-Connie Collegiate

Dear Connie,

IRS Publication 970, which covers this general subject of 529 plans, doesn't specifically discuss college application fees and whether they are qualified education expenses. But the publication does cite "expenses related to enrollment or attendance at an eligible educational institution."

Some schools specifically indicate application fees are NOT considered a qualified education expense. At issue is what expenses can be funded from the 529 account without being considered a taxable distribution. If you have to pay taxes, that defeats the purpose.

Understandably, one might try to make the case that you have to pay the application fee to be admitted to the school and it is therefore related to enrollment. Even if that argument were allowed by the IRS, it could only apply to the one school you actually attend.

I believe it's not worth the trouble or tax risk to pursue this path. Pay application fees from your checking account, not your 529 plan. Save the plan for tuition and other qualified education expenses. You likely have plenty of those anyway. Good luck in grad school.

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