Do 529 Plans Have to Be Used for College?

A 529 plan is a tax-advantaged savings vehicle for education costs. These plans are sponsored by states or educational institutions and offer notable tax benefits. Funds grow tax-deferred, and qualified withdrawals are tax-free.

Defining Qualified Education Expenses

To avoid taxes or penalties, 529 plan funds must be used for qualified education expenses. The definition of “college” extends beyond tuition, covering various educational institutions. An eligible educational institution is any college, university, vocational school, or post-secondary institution participating in federal student aid programs.

Qualified expenses include tuition and fees for enrollment or attendance. This covers programs from four-year universities to community colleges, graduate schools, and accredited vocational and trade schools. It also includes expenses for online courses from eligible institutions.

Beyond tuition, qualified costs include books, supplies, and equipment required for enrollment. This includes textbooks, laboratory materials, and other mandatory coursework items. Computers and related technology also qualify if primarily used by the beneficiary during enrollment. This includes peripheral equipment, educational software, and internet access; entertainment software is not covered.

Room and board expenses are also qualified, with specific conditions. The beneficiary must be enrolled at least half-time for these costs to be covered. For both on-campus and off-campus living, the qualified amount for room and board is limited to the institution’s cost of attendance (COA) for federal financial aid. This can include meal plans and, for off-campus living, groceries, if the total remains within the COA.

For beneficiaries with special needs, expenses related to their enrollment are qualified. This includes adaptive software, hardware, sensory integration tools, and mobility equipment necessary for their educational program.

529 plans can also be used for K-12 education. Up to $10,000 per year per student can be withdrawn tax-free for K-12 tuition. As of July 4, 2025, qualified K-12 expenses include books, curricular materials, tutoring, online educational materials, and standardized test fees. This annual K-12 limit is set to increase to $20,000 per beneficiary in 2026.

Consequences of Non-Qualified Withdrawals

Using 529 plan funds for non-qualified expenses has implications for account owners. If a 529 plan withdrawal is not used for a qualified education expense, the earnings become subject to federal income tax. Depending on state laws, these earnings may also be subject to state income tax.

In addition to income tax, a 10% federal penalty is typically assessed on the earnings of non-qualified withdrawals. It is applied to the investment gains within the account, not the original contributions.

However, the 10% federal penalty may be waived in certain circumstances, even if the withdrawal is non-qualified. If the beneficiary receives a tax-free scholarship or other tax-exempt educational assistance, the penalty is waived up to that assistance amount.

The penalty is also waived if the beneficiary attends a U.S. military academy, up to the cost of attendance. Other exceptions include the beneficiary’s death or permanent disability. Additionally, the 10% penalty may be waived if expenses are covered by employer-provided educational assistance.

Flexible Uses and Fund Management Options

Even if traditional college attendance is not pursued, 529 plans offer flexible options for managing funds without penalties. One flexibility involves changing the account’s beneficiary.

Funds can be transferred to another eligible family member without penalty, benefiting a sibling, parent, first cousin, or other qualified relative. Another use for 529 funds is qualified student loan repayment. Account owners can use up to a lifetime limit of $10,000 from a 529 plan to repay principal and interest on qualified student loans for the beneficiary. This $10,000 lifetime limit also applies to student loans for each of the beneficiary’s siblings.

Funds can also be applied to registered apprenticeship program expenses. This includes fees, books, supplies, and equipment required for programs registered and certified with the Secretary of Labor.

A recent provision allows limited rollovers from 529 plans to Roth IRAs. As of 2024, up to $35,000 can be rolled over tax-free and penalty-free over the beneficiary’s lifetime. Several conditions apply: the 529 account must be open for at least 15 years, and contributions or earnings from contributions made within the last five years are not eligible. The annual rollover amount is also subject to the Roth IRA’s annual contribution limits.