Can You Take Money Out of a 529 Plan?

A 529 plan is a tax-advantaged savings vehicle designed to help families save for future education costs. These plans are sponsored by states or educational institutions and are recognized under Section 529 of the Internal Revenue Code. The money within these plans is intended for educational pursuits, and specific rules govern how and when funds can be withdrawn.

Qualified Withdrawals

Withdrawals from a 529 plan are “qualified” when used for eligible educational expenses, known as Qualified Higher Education Expenses (QHEEs). These expenses include tuition and fees, books, supplies, and equipment necessary for attendance. Expenses for special needs services incurred by a special needs beneficiary also qualify.

Room and board expenses are qualified if the student is enrolled at least half-time at an eligible educational institution. The qualified amount for room and board is limited to the allowance included in the institution’s cost of attendance for federal financial aid, or the actual amount charged if the student lives on campus. Expenses for computers, software, internet access, and related services are qualified if used primarily for the beneficiary’s education. Funds can also be used for fees, books, supplies, and equipment required for U.S. Department of Labor-certified apprenticeship programs.

Recent expansions to QHEEs include up to $10,000 per year for K-12 tuition at public, private, or religious elementary or secondary schools. This annual limit will increase to $20,000 per student in 2026. Additionally, 529 funds can repay up to $10,000 in student loans per beneficiary, a lifetime limit. Withdrawals for these qualified expenses are entirely tax-free at the federal level, and typically at the state level. No federal penalty applies to these distributions.

Non-Qualified Withdrawals

A non-qualified withdrawal is any distribution from a 529 plan not used for Qualified Higher Education Expenses. The earnings portion of such a withdrawal is subject to federal income tax at the recipient’s ordinary income tax rate. A 10% federal penalty tax is also applied to the earnings portion. Original contributions are returned tax-free, as these funds were deposited with after-tax dollars.

The 10% federal penalty tax may be waived in specific situations, even if the withdrawal is not for QHEEs. Exceptions include the death or disability of the beneficiary. If the beneficiary receives a scholarship, withdrawals up to the scholarship amount are exempt from the penalty, though income tax on earnings still applies. Attendance at a U.S. military academy also exempts withdrawals, up to the cost of attendance, from the penalty. Other exceptions include receipt of tax-free educational assistance, such as GI Bill benefits, or if the beneficiary is unable to attend an eligible educational institution due to a serious illness or injury.

Making a Withdrawal

Requesting a withdrawal from a 529 plan involves direct interaction with the plan provider. Account holders can initiate requests through online portals, specific withdrawal forms, or by phone. Each method requires providing details to ensure correct fund disbursement.

When submitting a withdrawal request, account holders provide their account number, name, Social Security Number or Taxpayer Identification Number, and the beneficiary’s name and identification. They must specify the exact amount and purpose of the withdrawal, such as for tuition, books, or room and board. Account owners indicate who should receive the funds: the account holder, the beneficiary, or direct payment to the educational institution. Most plans offer direct deposit via Automated Clearing House (ACH) or a mailed check.

Allow sufficient time for withdrawal processing and fund arrival. Electronic transfers take 3 to 10 business days, while checks may take longer, 7 to 10 business days, plus mailing time. Some plans offer expedited electronic payments for a fee, arriving within 2-3 business days. Planning ahead for tuition deadlines helps ensure timely payment and avoids late fees.

Handling Unused Funds

If funds remain in a 529 plan after the beneficiary completes education or decides not to attend, account owners have several options to avoid or minimize tax consequences. One approach is changing the beneficiary to another eligible family member. This can be done without incurring tax consequences, and eligible family members include siblings, parents, first cousins, spouses, or children of the original beneficiary.

Another option for beneficiaries with disabilities is rolling over funds to an ABLE account. An ABLE account provides tax advantages for individuals with disabilities, allowing them to save for qualified disability expenses while preserving eligibility for means-tested government benefits. This rollover utilizes funds for essential needs related to the beneficiary’s disability.

The SECURE Act 2.0 introduced a provision allowing rollovers from a 529 plan to a Roth IRA, under specific conditions. The 529 account must have been open for at least 15 years, and any contributions or earnings rolled over must have been in the account for at least five years. The amount transferred is subject to the Roth IRA’s annual contribution limits, with a lifetime maximum of $35,000 per beneficiary. While these rollovers are tax-free, the beneficiary must have earned income at least equal to the amount transferred in that year.

Account owners can also take a non-qualified withdrawal of remaining funds. The earnings portion of this withdrawal will be subject to federal income tax and a 10% federal penalty tax.