529 Plans

Can 529 Programs Be Used for Graduate School?

Understanding what you can or cannot use a 529 plan for can help you make a better financial decision. Learn how 529 plans can be used for grad school.

January 15, 2021
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Sootchy Team
Can 529 Programs Be Used for Graduate School?

For people in a wide variety of industries, graduate school is a necessity if you want to get ahead. Unfortunately, the high cost of college these days can make it difficult for many students to cover the cost of graduate education, even with the help of scholarships and federal financial aid. One of the most popular tools families use to pay for college tuition is the 529 plan, but these accounts can only be used for specific, education-related purposes if you want to take full advantage of their benefits. Perhaps for this reason, many people who have 529 plans or who are considering opening one are unsure about whether grad school is covered by their plan, so it’s worth asking: “Can 529 programs be used for graduate school?” To find out, keep reading as the experts at Sootchy provide some answers.

What 529 Programs Can Be Used to Pay for Grad School?

If you’ve looked into opening a 529 plan for yourself or a loved one, you may already know that there are a few different types, each with its own benefits and limitations. Typically, families sign up for either a 529 education savings plan or a 529 prepaid tuition plan, though disabled Americans also have the option of opening an ABLE account, also known as a 529A plan. So, you may ask, which of these plans can be used to help cover the cost of graduate school?

Prepaid Tuition Plans

Though they’re the least flexible of the 529 programs, prepaid tuition plans can be very useful as a way to secure today’s tuition rates for a future student. Given the rate at which college costs are increasing, this rate guarantee can save families significant amounts of money, and the fact that these 529 programs can generally be used for graduate school in addition to undergrad makes them all the more helpful. However, a prepaid tuition plan can only be used for its stated purpose – to pay for tuition, and only tuition, in advance – so don’t expect your plan to cover room and board or equipment costs when you head off to grad school.

Education Savings Plans

The most popular of the 529 programs is the education savings plan, which can cover a wide variety of education-related expenses, including the cost of attending graduate school. Unlike a prepaid tuition plan, however, an education savings plan can be used for things like housing costs, computers, books, and other necessary expenses. Plus, the account owner of an education savings plan has far more flexibility in determining the investments for a particular account as well as the size and frequency of contributions.

ABLE Accounts

For Americans with disabilities, an ABLE account offers an excellent way to set aside money without incurring federal or state income taxes. Like other 529 plans, ABLE accounts earn returns on investments that can then be spent tax-free on a variety of education costs, including graduate school, but these accounts go much further; beneficiaries can use the funds to pay for housing costs, job training, medical expenses – virtually any financial burden they might bear because of their disability.

Benefits of Paying for Graduate School with a 529 Program

As we mentioned above, 529 programs offer a number of benefits, such as federal and state tax advantages, that make them the preferred college savings tool for many families around the country. If you or someone you know is looking to attend grad school, consider the following tax benefits of a 529 program:

No Tax on Gains

With most investment accounts, any amount you earn on top of the principal would be subject to income tax or capital gains tax, but 529 programs let you grow contributions without having to worry about being taxed on those gains. Early contributions could therefore earn you thousands or tens of thousands of dollars in tax-free income that can then be put toward graduate school.

Funds Never Expire

The money in a 529 plan will never expire, so any unused funds can later be used to make qualified distributions – the term for the kind of payments you’re allowed to make from a 529 program – beyond the original purpose of the program. For instance, a student with a 529 plan could get a scholarship during undergrad and may not need to use their plan, but that money can then be used for graduate school instead. Account owners could even switch beneficiaries and use that money for another family member instead.

Get a Deduction or Credit for Contributions

Though not applicable everywhere, people in many states can get a state tax deduction or credit for simply contributing to a 529 plan. In a few places, these tax breaks are reserved for account owners, but other states allow anyone contributing to any plan to deduct some or all of their donations, creating a financial incentive for people to give to 529 plans and help their loved ones pay for undergrad or grad school.

Open a 529 Plan Today and Start Saving for Graduate School

Saving for college is often thought of as a nearly impossible feat, but 529 programs can lend a big helping hand for families looking to send their loved one off to college, whether they’re headed for an undergrad program or graduate school. Opening a 529 plan is easy; just download the Sootchy app and let our experts guide you through the process. Learn more about the benefits of 529 plans by visiting us online today.

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