Computer-related expenses are covered

You can now withdraw money from a 529 plan to pay for computer-related expenses. (Previously, 529 rules treated computers as qualified expenses only if a school required them as a condition of enrollment.)

Under the new law, computers—along with computer hardware, equipment (printers, software, etc.), and internet access and related services—are always considered qualified higher education expenses, as long as the beneficiary is the primary user while enrolled at an eligible school.

Now available: The option to recontribute

Before the new law, an account owner who withdrew money from a 529 plan, paid for an eligible expense, and then received a refund for that expense would have to treat the withdrawal as nonqualified, which resulted in income inclusion (additional taxable income that needs to be reported) and penalties.

But now, account owners have the option to recontribute the refunded money to any 529 plan for the same beneficiary and avoid any taxes or penalties (as long as they recontribute within 60 days of receiving the refund). For example, if you take a withdrawal to pay for a class—and the student withdraws from that class—and you receive a refund, you can recontribute the amount you originally withdrew without tax or penalty.

You don’t need to report the recontribution on your tax return, but keep details on any refunds and recontributions for your records.

Change to the potential “cost” of a nonqualified distribution

Own multiple accounts for the same student? Previously, if you took a nonqualified withdrawal from one of the accounts, the contributions and account values for all of your accounts would be combined to calculate the earnings portion of the nonqualified distribution. (Earnings on nonqualified withdrawals are subject to federal and possibly state income tax and a 10% penalty.)

Going forward, you can calculate the earnings portion of a nonqualified distribution on an account-by-account basis, using the contribution history and account value of the 529 account from which you took the withdrawal. And if you identify the 529 plan with the least amount of earnings before you take a withdrawal, you can take the money from that plan, reducing the amount of taxes and penalties you may be assessed.

Investment returns are not guaranteed, and you could lose money by investing in a 529 plan.

We recommend that you consult with a tax or financial advisor about your individual situation.