Can college savings plans be used to buy something else?

When it comes to tax-advantaged investment funds, the rules about withdrawing the money can leave people confused.

In a recent column, I debunked five myths of 529 college-savings plans (http://wapo.st/2sgIGOd). But that myth-busting led to some follow-up questions from readers.

Q: Can you use 529 funds to buy a computer? What about software?

A: Previously, you could use money from a 529 plan to buy a computer only if it was required by the college for attendance. That is no longer the case. Savings can indeed be used to buy a computer or pay for internet access as a qualified higher-education expense. An iPad used for college would also qualify, as would any related peripheral equipment, such as a printer. But software designed for sports, games or hobbies is excluded, unless it is predominantly used for educational purposes, according to the IRS.

Q: Can 529 funds be used to buy a car to get to and from college?

A: Unfortunately not, says Gregg Wind, a certified public accountant who is a partner with Kallman, Thompson & Logan in Los Angeles. A car would be considered a “non-qualified use” of the funds. “Transportation of any type is generally not qualified,” he said.

Q: My daughter received a full ride (minus books) to Towson University in Maryland, so I have some extra money in my 529 plan that I would like to withdraw. She has just finished her junior year. What are the rules for withdrawing the funds?

A: Typically, if you withdraw money from a 529 and it is not used for qualified education expenses, you have to pay income tax on the funds and you’re assessed a 10 percent penalty.

“You can withdraw funds, up to the amount of the scholarship award without incurring the 10 percent penalty,” Wind said, “but income taxes will still be due on earnings.”

Q: I would like to start a plan for my grandchildren, ages 7 months and 2 1/2. They live in Maryland and I live in Virginia. Do I need to pick a Virginia plan to get the income-tax credit/deduction? If I use a Virginia plan, can the monies be used in any state for education expenses? Can you direct me to a website about plans? I have looked, but it is somewhat overwhelming. Is the age-based plan a good idea?

A: Let me unpack these questions.

First, many states offer residents a tax deduction for contributions to a state-run 529 plan. In Maryland, the deduction is $2,500 a year per account. Virginia taxpayers using their state’s plan, Virginia 529 (www.virginia529.com), can deduct up to $4,000 per year per account from their state individual income taxes, although state residents 70 or older can deduct the entire annual amount of their contributions.

And may I add that while the state tax deduction is a good bonus, you should still shop around for the best plan, always keeping an eye on fees. Any deduction you get could be negated by higher fees and lower performance.

One enduring misconception about 529 plans is that your child has to go to a school in the state where you set up a plan. It’s just not the case. Your child or grandchild can use money invested in a 529 plan — even a prepaid tuition plan — to go to any eligible public or private educational institution in the U.S. and even to some overseas universities. To check the eligibility of a school, go to fafsa.ed.gov and select “School Code Search.”

When my husband and I set up 529 plans for our three children, we chose the age-based investment option. Think of it like a set-it-and-forget-it way to save. If you open an account when your child is an infant, the portfolio may be more aggressive in its holdings in your child’s early years. But as he or she gets closer to starting college, the mix of assets is changed to reduce the risk. For example, a parent using Virginia’s 529 plan today for a child up to 3 years old might select the “2033 Portfolio.” The investment allocation for this portfolio as of January was 73.3 percent equities and 26.7 percent fixed Income. But if you’re getting a later start in investing and choose the “2024 Portfolio,” recommended for children 10 to 12, the mix would be 43.3 percent equity and 56.7 percent fixed income.

Let me leave you with the site I find to be the most helpful in answering 529 plan questions: www.savingforcollege.com. On the homepage, start with “College Savings 101.”