How to Pay for College From a 529 Account

Understanding Qualified Education Expenses

Utilizing a 529 account effectively involves understanding what expenses are considered “qualified” by the Internal Revenue Service. These expenses encompass costs associated with enrollment or attendance at an eligible educational institution, allowing for tax-free withdrawals. Eligible institutions include most accredited post-secondary schools, vocational schools, and certain international institutions.

Core qualified expenses include tuition, fees, books, supplies, and any required equipment. This also extends to computer technology, related equipment, and services like internet access, provided they are used by the beneficiary and their family during enrollment.

Room and board costs are also qualified expenses, but specific conditions apply. The student must be enrolled at least half-time in an eligible educational program. The qualified amount cannot exceed the allowance determined by the institution for federal financial aid purposes, or the actual amount charged for institution-owned housing. For off-campus living, the limit is the allowance published by the educational institution.

For students with special needs, expenses incurred in connection with their enrollment or attendance are also considered qualified. This ensures necessary services and accommodations can be covered tax-free from a 529 account.

Beyond higher education, 529 plans can be used for tuition expenses at elementary or secondary public, private, or religious schools, up to $10,000 per beneficiary per year. This annual limit applies across all 529 accounts for a single beneficiary. Effective July 4, 2025, qualified K-12 expenses expand to include non-tuition costs like curriculum materials, tutoring, and online learning subscriptions. The annual limit for K-12 expenses will increase to $20,000 per student starting in tax year 2026.

Qualified expenses also include fees, books, supplies, and equipment for participation in a registered apprenticeship program. These programs must be registered and certified with the Secretary of Labor under the National Apprenticeship Act.

Additionally, 529 funds can be used to pay principal and interest on qualified student loans. There is a lifetime limit of $10,000 per beneficiary, with an additional $10,000 lifetime limit for each of the beneficiary’s siblings. The portion of interest paid with 529 earnings may not be eligible for the student loan interest deduction.

Maintaining meticulous records, including receipts, invoices, and enrollment verification, is important for all expenses. This documentation is essential to substantiate the qualified nature of withdrawals, particularly during an audit by tax authorities.

Initiating a Withdrawal

Accessing funds from a 529 account involves a structured process, typically managed through the plan administrator. Once qualified education expenses are identified, the account owner can initiate a withdrawal request.

Funds can be distributed in two primary ways: direct payment to the educational institution or reimbursement to the account owner or beneficiary. Direct payments simplify the process by sending funds directly to the college or university, often requiring the institution’s name, student ID, and the specific amount due.

Alternatively, the account owner or beneficiary can request a distribution to themselves for qualified expenses already paid out-of-pocket. This reimbursement option offers flexibility. The payment to the account owner or beneficiary must occur within the same calendar year as the qualified education expense was incurred to maintain tax-free status.

Requests for withdrawals are commonly made through various channels provided by the 529 plan administrator. These methods include online portals, telephone calls, or submitting a physical form. Online requests are generally the fastest, while mailed checks may take longer to process and deliver.

When requesting a withdrawal, specific information is required for accurate and timely disbursement. This includes the beneficiary’s name and social security number, the exact amount requested, and the purpose of the withdrawal. If funds are sent to an institution, their name and address are needed; for direct deposits, bank account details for the recipient are necessary.

Strategic timing of withdrawals is also a consideration. Plan withdrawals in advance, accounting for processing times by the 529 plan administrator, which can range from a few business days to over a week, and the institution’s payment deadlines. Initiating the request well before the due date helps ensure funds arrive on time.

Tax Considerations for 529 Withdrawals

Understanding the tax implications of 529 withdrawals is important for account owners, as it directly impacts the financial benefits. Withdrawals used for qualified education expenses are entirely tax-free at the federal level, and in most cases, at the state level. This means investment earnings within the account, which have grown tax-deferred, are not subject to income tax if used for eligible educational costs.

However, if a withdrawal is not used for qualified education expenses, it is a non-qualified withdrawal. The earnings portion of that distribution becomes subject to federal income tax at the account owner’s ordinary income tax rate. This taxation applies only to the earnings, not to the original contributions, which were made with after-tax dollars. Some states may also recapture previously claimed tax deductions or credits on contributions if non-qualified withdrawals are made.

In addition to federal income tax on earnings, non-qualified withdrawals incur an extra 10% federal penalty tax on the earnings portion. This penalty discourages using 529 funds for purposes other than education.

Specific exceptions exist where the 10% federal penalty tax does not apply, even if the withdrawal is non-qualified. These exceptions include the death or disability of the beneficiary. The penalty is also waived if the beneficiary receives a tax-free scholarship or grant, up to the scholarship amount, though earnings may still be taxable.

Further exceptions to the 10% penalty apply if the beneficiary enrolls in a U.S. military academy, up to the cost of attendance. The penalty is also waived if the withdrawal amount equals expenses used to claim an eligible education credit, such as the American Opportunity Tax Credit or Lifetime Learning Credit. While these exceptions remove the penalty, the earnings portion of the distribution may still be subject to income tax.

Account owners will receive Form 1099-Q, “Payments from Qualified Education Programs,” from their 529 plan administrator. This form reports the gross distribution, along with a breakdown of the earnings and basis (contributions) portions of the withdrawal. It is the account owner’s responsibility to determine the taxability of the distribution based on their qualified education expenses, as the form itself does not indicate taxability.

Maintaining thorough records of all qualified education expenses is important for tax purposes. These records are necessary to substantiate that withdrawals were used for eligible costs, allowing account owners to reconcile their expenses with Form 1099-Q and ensure accurate tax reporting.