How to Get Money Out of a 529 Plan

A 529 plan is a tax-advantaged savings vehicle designed to help individuals save for future education expenses. These plans, often sponsored by states or educational institutions, offer potential tax benefits, such as tax-free growth of earnings and tax-free withdrawals when funds are used for qualified education costs. Understanding how to access these funds and the associated rules is important for maximizing the benefits of this savings tool.

Defining Qualified Education Expenses

For withdrawals from a 529 plan to be federal income tax-free, they must be used for “qualified education expenses” as defined by the Internal Revenue Service (IRS). These expenses include costs associated with enrollment and attendance at an eligible educational institution, including colleges, universities, vocational schools, and other postsecondary institutions. The primary costs covered are tuition and fees required for enrollment or attendance.

Beyond tuition and fees, qualified expenses include books, supplies, and equipment necessary for attendance. If the beneficiary has special needs, expenses for services incurred in connection with their enrollment or attendance also qualify. For students enrolled at least half-time, room and board expenses are considered qualified, though limitations apply; these costs cannot exceed the allowance for room and board determined by the institution or the actual invoice amount for on-campus housing.

Technology-related costs are also included, such as expenses for computers, peripheral equipment, computer software, or internet access and related services, provided they are used primarily by the beneficiary during their enrollment. Additionally, 529 plans can cover up to $10,000 per year per beneficiary for tuition expenses at elementary or secondary public, private, or religious schools. This K-12 tuition limit is a federal tax rule, and while many states align, some state tax rules may vary or impose recapture of prior state tax benefits for K-12 withdrawals.

The definition of qualified expenses has expanded to include certain apprenticeship programs, specifically those registered and certified with the Secretary of Labor. Funds can also be used for student loan repayment, with a lifetime limit of up to $10,000 per beneficiary and an additional $10,000 for each of the beneficiary’s siblings.

Requesting a 529 Distribution

Once you have identified that your expenses qualify, the next step involves initiating a withdrawal from your 529 plan. The process typically begins by contacting your plan administrator, which can often be done through their online portal, by phone, or via mail. Most plan providers offer an online interface that allows account owners to manage their accounts and submit withdrawal requests electronically, often being the most efficient method.

When requesting a distribution, you will generally need to provide specific information. This includes your 529 account number, the beneficiary’s name and Social Security or Taxpayer Identification Number, the withdrawal amount, and sometimes the purpose. If the funds are going directly to an educational institution, you may also need to provide the school’s name, address, and the student’s identification number.

You typically have several options for who receives the funds. You can choose to have the payment sent directly to the educational institution, reimbursed to the account owner (often a parent or guardian), or paid directly to the beneficiary. Sending funds directly to the institution can simplify record-keeping, while reimbursement to the account owner is common if expenses have already been paid out-of-pocket.

Timing your withdrawals is an important consideration for tax purposes. Distributions should generally occur in the same calendar year that the qualified education expenses were incurred. For example, if you paid tuition in December for a spring semester starting in January, it is advisable to withdraw the 529 funds in December to align the expense and the withdrawal within the same tax year. Maintain thorough records, such as receipts and invoices, to substantiate that withdrawals were used for qualified expenses.

Understanding Non-Qualified Withdrawals

While 529 plans offer significant tax advantages for qualified education expenses, withdrawing funds for purposes other than those defined by the IRS can lead to tax consequences. If a distribution is non-qualified, the earnings portion is subject to the recipient’s ordinary income tax rate. The initial contributions, which were made with after-tax dollars, are never taxed upon withdrawal.

A 10% additional federal tax is assessed on the earnings portion of non-qualified withdrawals, in addition to federal income tax. This penalty applies unless specific exceptions are met. The recipient of the non-qualified distribution is responsible for paying these taxes.

The 10% additional tax penalty may be waived in several situations, even if the withdrawal is not for qualified education expenses. These exceptions include cases where the beneficiary dies or becomes permanently disabled. The penalty can also be waived if the beneficiary receives a tax-free scholarship, up to the scholarship amount.

Other exceptions include attendance at a U.S. military academy, with the penalty waived up to the cost of attendance. The penalty is also waived if the withdrawal amount equals qualified higher education expenses used to claim federal education tax credits, such as the American Opportunity Tax Credit or the Lifetime Learning Credit. Tax-free rollovers of 529 funds to another 529 plan for the same beneficiary or a qualified family member, or to an ABLE account for a beneficiary with a disability, are also exempt from the penalty.