Can You Use Your 529 To Take A Cruise?

“Has anyone had clients actually do the apocryphal story of a client using a 529 to go on a continuing education cruise of Europe?” asked one of my peers in a recent forum, “Trying to figure (this out) after client asked.”

Can You Get An Education At Sea?

There are a host of companies offering education opportunities in combination with a cruise. Continuing Education, Inc. claims to have, “over 100 Continuing Medical Education and Dental CE cruise conferences.” This allows medical professionals to fulfill the requirements of their professional designation in combination with a vacation. There’s also University at Sea, CME Away at Sea, AEA Optometric Cruise Seminars, and many, many more companies that would gladly give a professional continuing education classes and an excuse to vacation.

However, these are all continuing education classes, not college courses from an accredited school. These are for-profit companies that run conferences and seminars. In order to be considered a qualified withdrawal, 529 plans have requirements that need to be met.

When Withdrawals Are Qualified

To be considered qualified, withdrawals from a 529 plan must be made to reimburse expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. That means it must meet two criteria:

1. An eligible educational institution can be an elementary, secondary, or postsecondary school. According to the IRS, and “eligible postsecondary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.”
2. The expense must be a qualifying expense. For postsecondary schools this includes tuition, fees, books, supplies, equipment, room and board, computers, peripheral equipment, computer software, internet access charges, and certain special needs services and equipment. For K–12 schools it means up to $10,000 for tuition reimbursement only. Some of these expenses have qualifiers, meaning you may need to be enrolled at least half time, so check with your 529 plan, financial advisor, or review this article to ensure your withdrawal meets the requirements.

If the withdrawal does not meet the aforementioned requirements, and most “educational cruises” do not, then it is not a qualified expense, and your withdrawal will be subject to taxes plus penalties. There are a number of exceptions to the penalties and improvements that have been made, such as the death of the beneficiary or rolling the funds into a Roth IRA, but there are stringent requirements to qualify for those exceptions. Note that IRS Publication 970 has not been updated with guidance regarding the changes made by SECURE Act 2.0 regarding 529 rollovers, though Robert Farrington has an excellent summary.

Programs Involving Travel That ARE Qualified Expenses

Some “gap year” programs, which are taken by a student as a break between secondary school and higher education, have partnered with higher education institutions to qualify for funding from 529 accounts. This includes certain international and domestic gap year, outdoor education, study-abroad, wilderness survival, sustainable living trades, and art programs.

Moreover, more colleges are offering gap year programs directly to their students. For instance, between 90 and 130 students defer matriculation to Harvard College to participate in a gap year. Many other colleges have similar programs, from Princeton to Tufts, and programs vary widely.

Additionally, primary school students over 14 can use 529 funds for college credit classes, where available. Brown, Cornell, Georgetown, and many more colleges offer these programs, potentially allowing the student to graduate early.

“The 529 Advantage” has a growing list of institutions that offer gap year and travel programs that are considered qualified expenses for purposes of 529 plan withdrawals. No cruises, though. At least, not yet.

Can I Use My 529 Plan To Pay For A Cruise?

Yes, you can use your 529 plan to pay for a cruise. You can use it to pay for a new car, a downpayment on a home, or to have a raging party. However, those withdrawals would be considered nonqualified and subject to federal income tax on the earnings portion of the withdrawal, as well as a 10% penalty on the earnings. The penalty is designed to discourage people from using 529 plan funds for non-educational purposes.

Like cruises.