Can a Parent Withdraw Money From a 529 Plan?

A 529 plan is a tax-advantaged savings account for future education costs. These plans are established by an account owner, often a parent, for a designated beneficiary, such as a child. The account owner controls the funds and can request withdrawals at any time. The distinction is not whether a parent can withdraw money, but how the funds are used, which determines the tax consequences. Withdrawals are classified as either qualified or non-qualified, with different rules applying to each.

Understanding Qualified Withdrawals

A qualified withdrawal from a 529 plan is a tax-free distribution used for specific, approved education expenses. To be considered qualified, the amount withdrawn cannot exceed the beneficiary’s adjusted qualified education expenses. This is calculated by taking total expenses and subtracting tax-free aid like scholarships, or expenses used for other tax benefits like the American Opportunity Tax Credit. Keeping detailed records of all expenditures is important for tax reporting.

The most common qualified expense is tuition and mandatory fees for enrollment at an eligible college, university, or vocational school. The definition of qualified expenses has also expanded to include up to $10,000 per year, per beneficiary, for tuition at public, private, or religious K-12 schools.

Beyond tuition, funds can be used for books, supplies, and equipment required for courses. Room and board costs also qualify if the student is enrolled at least half-time. The expense cannot be more than the allowance for room and board included in the school’s official cost of attendance.

Other qualified expenses include:

• Technology, such as computers, software, and internet access, used primarily by the beneficiary during enrollment.
• Expenses for beneficiaries with special needs that are necessary for their enrollment and attendance.
• Fees, books, and supplies for participation in a registered apprenticeship program certified by the U.S. Department of Labor.
• A lifetime limit of $10,000 per individual to pay the principal and interest on qualified student loans for the beneficiary or a sibling.

Consequences of Non-Qualified Withdrawals

A withdrawal for any reason other than a qualified education expense is considered non-qualified. These distributions have financial consequences that apply only to the earnings portion of the withdrawal, not the original contributions. Contributions were made with after-tax money and can always be withdrawn federally tax-free and penalty-free. Every withdrawal is allocated proportionally between contributions and earnings.

The earnings portion of a non-qualified withdrawal is subject to federal ordinary income tax at the recipient’s tax rate. If the parent receives the funds, the earnings are taxed at their rate; if sent to the beneficiary, they are taxed at the beneficiary’s rate, which is often lower. In addition to income tax, a 10% federal tax penalty is applied to the earnings.

State tax rules also apply. Depending on the state, earnings may be subject to state income tax. Some states may impose their own penalty or require the recapture of any state income tax deductions previously claimed for contributions.

The 10% federal penalty is waived in specific situations, although income taxes on earnings may still apply. These exceptions include the death or permanent disability of the beneficiary. The penalty is also waived for withdrawals up to the amount of a tax-free scholarship, attendance at a U.S. military academy, or other tax-free educational aid.

A provision allows unused 529 plan money to be rolled over to a Roth IRA for the beneficiary without federal tax or penalties. The 529 account must have been open for at least 15 years, and contributions from the last five years are not eligible. The amount rolled over is subject to the beneficiary’s annual Roth IRA contribution limit and has a lifetime maximum of $35,000.

Making a Withdrawal

The process of withdrawing funds from a 529 plan is straightforward and initiated by the account owner. Before starting, gather necessary information, including the account number, the beneficiary’s name and Social Security number, and the exact amount needed. If paying the school directly, you will also need its name, address, and the student’s ID number.

Most plans offer several withdrawal methods, such as using an online portal, mailing a request form, or calling the plan administrator. Online requests are often fastest, with electronic transfers taking 3-5 business days, while mailed checks may take 7-10 business days.

You will need to select the recipient of the funds. The money can be paid directly to the account owner, the beneficiary, or the educational institution. If funds are sent to the owner or beneficiary, they are responsible for paying the school and keeping records to prove the money was used for qualified expenses. Paying the school directly simplifies record-keeping.

After a withdrawal, the plan administrator issues IRS Form 1099-Q to the recipient. This form reports the gross distribution, the earnings portion, and the contribution basis. The recipient uses this form to report the distribution on their federal tax return and show that the funds were used for qualified expenses to avoid taxes and penalties.