Can You Use 529 Money to Buy a House?

A 529 plan is a tax-advantaged savings account designed for funding education-related costs. The funds grow federally tax-deferred, and withdrawals are tax-free when used for qualified higher education expenses. Using 529 money to purchase a house is not a qualified expense. This action is considered a non-qualified withdrawal and will trigger tax consequences, negating many of the plan’s benefits.

Using 529 Funds for Student Housing Costs

While a 529 plan cannot be used to buy a house, it can be used to pay for a student’s housing costs while they are in school. This is a qualified expense, but it comes with specific Internal Revenue Service (IRS) rules. The primary requirement is that the plan’s beneficiary must be enrolled at least half-time at an eligible educational institution for the housing costs to qualify.

The rules for housing expenses differ depending on where the student lives. For students living in on-campus housing, the process is straightforward. The amount that can be withdrawn from the 529 plan is the amount the school charges for its room and board, which includes costs for dormitory housing and associated meal plans.

For students in off-campus apartments or rental homes, the 529 withdrawal cannot exceed the room and board allowance in the school’s official “cost of attendance” (COA). This COA figure is determined by the college’s financial aid office and represents an estimate of what a student might spend on living expenses for the academic year. To find the specific COA, consult the financial aid section of the school’s website or contact the office directly.

This allowance covers rent, utilities, and a budget for groceries. It explicitly does not cover mortgage payments, a down payment on a property, or any closing costs associated with a real estate purchase.

Penalties for Non-Qualified Withdrawals

Taking money from a 529 plan for a non-qualified purpose, such as buying a house, has direct financial repercussions. Any withdrawal is separated into two parts: the original contributions (the basis) and the investment earnings. The portion representing your original contributions is always returned free of any tax or penalty.

The earnings portion of a non-qualified withdrawal faces two consequences. First, these earnings are subject to ordinary income tax at the recipient’s marginal tax rate. Second, the IRS imposes an additional 10% federal penalty tax on those same earnings.

In addition to federal taxes and penalties, many states that offer an income tax deduction or credit for 529 contributions may impose their own penalties. This could involve recapturing previously claimed tax deductions or applying a separate state-level penalty on the earnings.

Calculating the Taxable Portion of a Withdrawal

The calculation for a non-qualified withdrawal hinges on the pro-rata rule. This rule dictates that every withdrawal consists of a proportional mix of original contributions and investment earnings. You cannot choose to withdraw only your contributions while leaving the earnings behind.

Consider a 529 plan with a total value of $100,000, consisting of $60,000 in contributions and $40,000 in earnings. In this case, 40% of the account’s value is earnings. Consequently, 40% of any withdrawal will be treated as earnings, while the remaining 60% is a tax-free return of contributions.

If you took a $20,000 non-qualified distribution from this account, the taxable amount would be $8,000 (40% of $20,000). This $8,000 would be subject to both ordinary income tax and the 10% federal penalty, resulting in an $800 penalty on top of the income tax owed. The plan administrator will issue Form 1099-Q, which reports the gross distribution and separates the earnings portion for tax reporting.

Alternative Strategies for Unused 529 Funds

For those with leftover 529 funds, there are alternatives to taking a penalized withdrawal. The SECURE 2.0 Act of 2022 introduced a provision for tax-free and penalty-free rollovers from a 529 plan to a Roth IRA for the plan’s beneficiary. This can be an effective way to repurpose education funds for retirement savings, which can then be accessed for a first-time home purchase under separate Roth IRA rules.

This rollover option is subject to several conditions:

• The 529 account must have been open for a minimum of 15 years.
• Any contributions or earnings from the last five years are not eligible to be moved.
• The amount rolled over in any given year cannot exceed the annual Roth IRA contribution limit, which for 2025 is $7,000 for individuals under 50 and $8,000 for those 50 and older.
• There is a lifetime maximum of $35,000 that can be moved from a 529 plan to a Roth IRA for any single beneficiary.

Another strategy is to withdraw only the original contributions from the 529 plan. This allows you to access a portion of the funds for a goal like a down payment while leaving the investment earnings in the account for another qualified beneficiary or a future educational need.