Using Your 529 to Pay for Off-Campus Housing
Yes, you can use your 529 for off-campus room and board and, assuming you have money in your 529, you should! And you should do it right to save money and hassle. There are a few elements to doing it right.
The right amount: Off-campus room and board are Qualified Higher Education Expenses (aka "OK to spend your 529 on") up to the lesser of actual costs or your college's stated off-campus room and board cost, which you'll find on its website under Cost of Attendance. That means that if the school's off-campus room and board cost is $8,000 per year and your student's apartment costs $1,000 per month, you would only be able to take $8,000 from your 529 as a qualified expense, not the $12,000-plus-food-and-utilities that you'll actually spend. (And just to take the edge off: that was a totally hypothetical example. You will find living options well within your college's budget.)
The right recipient: 529 distributions can go to the account owner (probably you), the beneficiary (the student) or to the school. Needless to say, in this case they can't go to the school. Sending it to the student is almost always the best choice in this case. Not only are paying their rent and having a grocery budget good life skills, but it drastically simplifies things come tax time.
There's a catch to getting 529 funds out to your student (if you haven't been doing this already). You'll need to link their bank account to the 529, and many (most?) 529s require an outside account to be linked for 45 days before you can send a distribution to it. So if you're going to use your 529 to pay for off-campus living expenses, now is a great time to link your student's bank account. (If you're just setting up your 529 for distributions, regardless of where your student lives you should do this now, because making them the recipient of the distribution is almost always the best option.)
The right 529: If you have a prepaid tuition plan in addition to or instead of a 529 savings account, you need to check your plan's rules to see if it can be used for room and board. Many such plans are only eligible for tuition and fees. (A prepaid 529 plan is a plan in which you buy "tomorrow's tuition at today's price." Instead of earning market returns based on your investment choices, your 529 grows by a set inflation rate, whether that of a particular school or group of schools or some other inflation index.)
The right strategy: You might be saying, "Why bother with my 529? I'm just going to pay this out of pocket." Did you know that you can continue contributing to your student's 529 while they're in college, and in many cases, continue getting your state's tax benefits for those contributions? Most 529s that offer a state tax benefit for contributions require that the amount on which you took the benefit still be in the account on Dec. 31 of the year for which you're claiming the benefit; they don't care-- or track-- which specific dollars went where. That means that if you're spending your account down over multiple years, you can deposit rent money into the 529 and withdraw it immediately to pay the rent, and still claim the tax benefit as long as you have other money in the plan. (Check your plan's rules to verify if your contributions are eligible for tax benefits.) Not only that, but your money can earn tax-free interest if you deposit it in advance. Most plans offer an FDIC insured investment option which pays a rate similar to a high-yield savings account; that's what you want to choose for money that's being used soon.
