As part of the new wave of migration from the US to New Zealand we’re currently witnessing, certain questions become quite familiar territory.

Of course, for those who migrate from the US to New Zealand, many have spent years building up financial accounts such as IRAs, 401Ks and in some cases, 529 accounts.

One very common question, is how the IRS treats 529 account withdrawals made in New Zealand, for US tax purposes.

What is a 529 account?

For our readers who are not familiar with this particular type of savings account, we’ll begin with a short overview.

A 529 account, also known as a 529 college savings plan, is a tax-advantaged savings plan designed to encourage saving for future education costs. As you may have guessed, the name 529 is referring to the section of the US tax code in which the legislation is laid out. T

A 529 account is one of the many types of tax beneficial accounts offered in the US, to help save for significant future costs. Other similar plans include HSA accounts (health savings accounts).

Contributions to a 529 plan are made with post-tax dollars, but the earnings grow tax-free, and withdrawals are likewise tax-free as long as they are used for qualified education expenses.

The IRS outlines qualified education expenses include costs such as tuition fees, educational materials such as books, and in some cases even room and board on campus.

When a 529 is withdrawn and not used on qualified educational expenses, then income tax will apply on the withdrawal, in addition to a 10% penalty on the earnings portion of the withdrawal.

This brings us down to the main question here, of whether an NZ university is a “qualified” educational expense.

Can I use a 529 account in New Zealand?

Fortunately, the answer here is yes. A 529 plan can be used for qualified educational costs with any educational institution which qualifies for Title IV federal student aid.

This is a set of requirements made upon the university, and once qualified, the university becomes eligible to participate in the Federal Student Loan Program.

As it currently stands, all recognised New Zealand universities are part of this program except for Auckland University.

This means that, provided a 529 is withdrawn for use at any of the New Zealand universities which participate in the Federal Student Loan Program, then the expense will be considered “qualified” (provided other conditions are met). Provided the funds are used on a qualified expense, then no reporting is needed on a US tax return.

How can I find out which New Zealand Universities are enrolled for Federal Student Aid and Qualify for 529 Withdrawals

This list is updated regularly and made available at http://studentaid.gov.

The current version of the list can be found here, and as you will see, other NZ educational institutions are also listed aside from the major universities.

Summary

For those considering migrating to New Zealand from the US with their family, the good news here is that the years of saving in a 529 plan do not go to waste. In most cases, a 529 can be withdrawn and used for qualified educational expenses in New Zealand, with little difference to use in the US.

Obtaining expert US tax advice with a qualified US tax specialist is recommended prior to the withdrawal of any US based retirement, educational, or health savings account, to ensure that all bases are covered and that no unexpected tax liability arises.

At The US Tax Team New Zealand, we offer professional US tax guidance, through friendly and easy to understand tax advice appointments. Reach out to us today – info@usatax.nz – 09-242-3445