529 plans, tax advantaged investment vehicles designed to make it easier to save and pay for college or alternate post-secondary training, have been in the news lately. These plans, otherwise known as qualified tuition programs, have become somewhat popular with families all too aware of the steadily rising cost of a college education.
Over the years, a number of clients have come to us requesting documentation so they could use 529 college savings plan funds to pay for their SAT & ACT prep. The practice become so common that we started telling new clients about the 529 option as a matter of course. Good thing we’re in education, not tax services!
The last time a client commented to me on how excited she was about the option of using 529 college funds to pay for prep, I decided to consult an actual accountant to confirm what I thought was true. False! Distributions from 529 plans are to be used only for higher education costs incurred while a student is enrolled at least half time in a qualified tuition program at an eligible educational institution. SAT & ACT prep for high school students clearly precedes college enrollment, at least when done right, so test prep doesn’t qualify.
There is some ambiguity in the tax code defining a qualified education expense as one related to enrollment or attendance at an eligible educational institution. One might think that test prep qualifies as a necessary expense related to enrollment at any school that requires SAT or ACT scores. However, qualified education expenses are more clearly defined as either tuition and fees or books, supplies, and equipment.
Apparently some savings instruments can be used to pay for test prep, but 529s are not. Of course, your accountant may disagree, so be sure to check!
Does anyone have other information to add to this question?
Mike Bergin