529 Qualified Expenses

[Ken V]

I have a grandson who will soon become a new Cadet at USMA. I'm interested in what of the $10,000+ first year costs for books, uniforms, etc. will qualify as Qualified Expenses under his 529 College Choice plan. Obviously books, computer equipment, etc. qualify but I'm not sure about uniforms and other cadet costs. Thx for any assistance.

 

[Capt MJ]

I have a grandson who will soon become a new Cadet at USMA. I'm interested in what of the $10,000+ first year costs for books, uniforms, etc. will qualify as Qualified Expenses under his 529 College Choice plan. Obviously books, computer equipment, etc. qualify but I'm not sure about uniforms and other cadet costs. Thx for any assistance.

Look for something like this on the USMA.edu site or in the cadet pay information document - I forget what this is called at West Point. Someone will know.

Scholarships/529 Plans

Scholarships/529 Plans page for Leaders to Serve the Nation at USNA.edu. Updated Thu Mar 30 16:34:33 EDT 2023.

www.usna.edu

Families should discuss with a qualified professional about their individual plan.

 

[HopefulDad2026]

Here is a thread with links to other threads regarding the topic. I’ve had similar questions myself.

529 Plans and SAs

Doing some research today on what we can do with the 529 plan for our DS and thought I would share this information with the forum. This is from www.savingforcollege.com "What happens if you've been saving with a 529 plan? While attending a service academy may be a tradition for some...

www.serviceacademyforums.com

 

[VelveteenR]

Because the service academies do not charge tuition, they are not considered 529-eligible institutions. However, the Military Family Tax Relief Act of 2003:

529 News - Military Tax Act eliminates 10% penalty for academy students

President George Bush signed the Military Family Tax Relief Act of 2003 (HR 3365) on November 11. Among other items, the Act provides that attendance at a U.S. military academy will be treated as a sc

www.savingforcollege.com

removes the tax penalty for non-qualified withdrawals. This means the funds return to you penalty-free, minus taxes on the gains, to spend as you wish, even on hookers and beer. It‘s just your money like any other investment fund you hold.

Our tax attorney suggested that we withdraw the funds at the rate we would for civilian college, 1/4 per year (or 1/8 per semester), holding on to the remainder in the event that, for whatever reason, our son chose to leave the academy and finish up at a civilian college. By the time he graduated, the entire fund had been reinvested into our retirement portfolio. We did not spend any of it on USMA.

Of course, if you have other children, this muddies things (our son is our only) and you will want to hold on to those funds for any civilians colleges you need to pay for.

 

[FiveByFive]

This means the funds return to you penalty-free, minus taxes on the gains, to spend as you wish, even on hookers and beer. It‘s just your money like any other investment fund you hold.

Outstanding.

 

[MidCakePa]

This means the funds return to you penalty-free, minus taxes on the gains, to spend as you wish, even on hookers and beer.

For example.

 

[OldAFRet]

Since 529 is after tax savings, you only have to pay tax on any gain or interest if the expense does not qualify. SOME of my son's ROTC gear does qualify since he is at a state school, rather than an academy. It has to be essential, non-issued gear.

Not sure about USMA, but I think at the USAFA, the cadets can use their 529s for tips to their waiters at mealtime.

 

[Sealion II]

529 funds are available to pay for Qualified Education Expeneses without tax or penalty. I'm not a CPA, but I doubt uniforms count. I have been wrong before. I'd also note that changing the beneficiary to another family member is fairly easy. They just have to be:

• Spouse
• In-laws, including a mother-in-law, father-in-law, brother-in-law, or sister-in-law
• Children, including step-children, foster children, or adopted children
• Siblings, including step-siblings
• Nieces and nephews
• Aunts and uncles
• First cousins

 

[VelveteenR]

For example.

Of course. I wouldn't want anyone to think the money couldn't be spent on bourbon as well as beer. I probably should have said, "hookers and the alcohol of your choice." My bad.

 

[UHBlackhawk]

You can also let your Cadet have the 529. Yes, it will be taxed at their current rate but as a Cadet this will be minimal. DD and DS used some of the 529 money to find IRAs.

 

[ProudMom7]

529 funds are available to pay for Qualified Education Expeneses without tax or penalty. I'm not a CPA, but I doubt uniforms count. I have been wrong before. I'd also note that changing the beneficiary to another family member is fairly easy. They just have to be:

• Spouse
• In-laws, including a mother-in-law, father-in-law, brother-in-law, or sister-in-law
• Children, including step-children, foster children, or adopted children
• Siblings, including step-siblings
• Nieces and nephews
• Aunts and uncles
• First cousins

My daughter is at USCGA, but I believe things operate the same where they pay for their uniforms, laptop, and books on their own. Those are *required* expenses for school, so they are absolutely eligible to be paid for with 529 funds (at least in our state). In fact, since all cadets at USCGA get a first year loan which covers these cost and they then pay back, we can send 529 funds directly to USCGA to help pay off that loan. I would assume it is the same at the other SAs as well.

 

[Haveaniceday]

Many parents use 529 funds to pay academy expenses, but it is a murky IRS area as the service academies are not considered colleges by the IRS, thus it is best avoided. It comes down to you cannot be a full time student and a member of the military fully employed at the same time. Let me explain:

When it comes tax time, the academy will not send your cadet a 1099-T like a civilian college will showing college expenses that were paid, and allowing you to claim your 529 draw against those 1099-T expenses. When you file taxes, the IRS basically matches the 1099 your state 529 plan issues you with the 1099-T from the college showing the tuition you paid and making you eligible to draw 529 funds. No 1099-T, no authorization for Qualified 529 draws. Service academies will have a Tax training for your cadet, so this will be explained to them. They will be told they are not to file as college students, but rather as members of the military which they are. They will be told they should not be claimed as dependents on their parents return, but to file as independent adults. Many people ask their state plan if they can draw their funds and are told incorrectly yes by the plan, but state law does not govern the federal tax code. The academies will also encourage the cadets to open an IRA either Roth or regular to make them eligible for the Retirement Savers Credit which will usually bring their Fed taxes to zero, and is also a great savings start. I note, if your cadet checks the college student box on the IRS from, they become in-eligible for the RSC; that is why they are told repeatedly not to file as a college student, but rather as a member of the military.

The best way to use 529 funds for your cadet is to take a non-qualified withdrawal where you will owe taxes on the gains you made. Since they are attending a service academy the 10% penalty is waived. This draw, if the check is made out to the cadet, is taxable income to them they must report on their return. But, since they only earn about 15K per year they are in a low tax bracket. You can draw a little each of the 4 years and keep them in a low bracket. If you follow academy advice and open a IRA they you will get access to the Retirement Savers Credit which will bring your tax down further and if done right, to zero with a draw of about 14K of 529 funds per year.

Some people ask, if all this is true, why do the academies allow me to send 529 funds to them to pay for uniforms etc. The answer is because they do not give out tax advice, just like the state 529 plans do not give out tax advice. For all they know, you did this as I described and took a NON-Qualified withdrawal, and everything is fine. If you try to make a qualified 529 draw (not subject to fed tax) and claim you have a full time student, that will conflict with the individual taxes your cadet files from the academy.

This is very complicated, but I hope this at least gives you enough to go to your tax adviser and discuss.

USMA 529 guidance attached below.

 

[Pettylvr]

Thanks for the information