Landing an internship can help students apply what they’re learning in college to the real world. But if you’re planning on applying funds from a 529 tax-advantaged college savings account to cover all of the expenses related to an internship, think again.
The first thing to do when trying to fund an internship experience is to figure out how much it’s likely to cost. The location of the internship can make a difference in what you pay out of pocket. If the workplace is located in the town where the student attends college or in the student’s hometown, expenses are much less than for out-of-town internship opportunities. No travel is required. No additional housing expenses may be needed, if the intern is staying in the same dorm or apartment, or at home for the semester.
Other incredible internship opportunities may be in a different city with higher costs of living, such as New York, Washington or Los Angeles, or even overseas. The cost of travel, housing and food could add up, depending on how much the internship pays or how expenses are handled by the employer. If the internship is unpaid, everything is out of pocket for students or their families, who may want to dip into college savings to cover those costs, including the following.
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— Tuition: There’s a common myth that families can use 529 funds for any college-related expenses, says Betty Lochner, chairwoman of the College Savings Plans Network. The savings in a 529 can only pay for what are known as qualified education expenses.
To figure out how to use any available 529 savings for internship costs during the school year or summer, the biggest factor is whether the student will earn college credit.
“Internships are great opportunities to get some real hands-on knowledge. Regardless of whether the internship is paid or unpaid, the bigger question is: Is a student earning school credit for an internship?” says Howard Joe, senior vice president and wealth manager for Merrill Lynch in Atlanta. “If earning school credit, there typically is a fee for that because credit hours cost money. In that case, the credit hours for the internship are tax-free.”
Students will pay tuition for earning a certain number of credit hours, and just as with any other semester, a 529 plan can cover tuition.
“You have to be enrolled,” Lochner says. “If you take it out of the context of college, an internship is just a job. Then no, you can’t use it because you’re not in school. If you’re not going to school and not getting credit, you would be hard-pressed to use your college savings.”
Joe has looked into international college internships for his daughter and says the same rules would apply.
“She would simply pay her normal semester tuition,” he says.
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— Housing: With housing, families should reference the financial allowances — called the “cost of attendance” — set by the student’s college or university.
Look at the amount estimated for room and board, and only use 529 dollars to fund up to that amount, if the student is enrolled and the internship relates to course work, says Morgan Chalk, a financial advisor with Ronald Blue & Co. in Atlanta.
Adds Lochner: “You couldn’t go live in a mansion. It wouldn’t cover that. But it would cover whatever you would normally have to pay for, for college expenses.”
[Check out these steps for using 529 plan funds.]
— Travel and food: Financial advisors advise against families using 529 funds for expenses such as travel to and from the internship city, as well as food. Joe says the 529 is typically for tuition, room and board, books and supplies, and he has never seen his clients attempt to use the savings to travel to a college, university or an internship city.
Airfare expenses are ineligible, Chalk says.
Without the student being on a meal plan, there’s no way to pay the school for groceries or eating out while participating in an internship, which means families should stay away from the 529 pot for those costs as well.
With 529 funds, it is the responsibility of students and their families to use the money in ways that are eligible or else face the consequences with tax penalties.
“Some would say, ‘Gosh, they should pay our room and board while we’re in an internship,'” Lochner says. “But you’re bound to the IRS rules.”
Chalk encourages families saving for college to think of situations where tax-free 529 expenses may not be allowed because of the IRS rules. A more flexible option, he says, would be a custodial account, such as the Uniform Gifts to Minors Act or Uniform Trust to Minors Act accounts. A family can save for a child’s education with generally the first $1,000 saved being tax-free.
Custodial accounts can be used for anything, so they make up for what 529s lack in flexibility, Chalk says. “Having a combination of those two can be helpful because these situations do come up that are not 529 eligible.”
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
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Turn to 529 Plan Savings for Some Internship Expenses originally appeared on usnews.com
