How to Take Money Out of a 529 Plan

A 529 plan is a tax-advantaged savings vehicle designed to help individuals save for future education expenses. Contributions grow free from federal and often state income tax, and earnings can be withdrawn tax-free for qualified education expenses. Understanding the proper procedures for withdrawing funds is important to maximize benefits and avoid potential tax consequences. This article provides guidance on qualified expenses, non-qualified distributions, withdrawal steps, and tax reporting.

Defining Qualified Education Expenses

For a 529 plan withdrawal to be tax-free, funds must be used for “qualified education expenses” (QEEs). These generally include costs for enrollment or attendance at an eligible educational institution, such as accredited public, private, and vocational schools participating in federal student aid programs.

Core qualified expenses include tuition, fees, books, supplies, and equipment necessary for enrollment. For students enrolled at least half-time, room and board costs also qualify. The allowable room and board amount, especially for off-campus housing, is typically capped at the institution’s federal financial aid allowance.

Beyond common costs, 529 plans can cover special needs expenses for beneficiaries with disabilities, if incurred with enrollment or attendance. Funds can also be used for fees, books, supplies, and equipment for registered apprenticeship programs certified by the Secretary of Labor.

529 plans can be used for student loan repayment, with a lifetime limit of $10,000 per beneficiary. For K-12 education, up to $10,000 per student per year can be withdrawn tax-free for tuition at public, private, or religious elementary and secondary schools. Beginning July 4, 2025, additional K-12 expenses like curriculum materials, books, tutoring, and online courses may also qualify.

Certain expenses are generally not considered qualified, including transportation, health insurance, and extracurricular activities not required for enrollment. College application and testing fees (e.g., SAT, ACT) are also typically non-qualified. Accurate record-keeping of all expenses is recommended to substantiate tax-free withdrawals if questioned by the IRS.

Understanding Non-Qualified Withdrawals

Withdrawing funds from a 529 plan for purposes other than qualified education expenses results in a “non-qualified withdrawal.” The earnings portion of such a withdrawal becomes subject to federal income tax at the recipient’s ordinary income tax rate. In addition to income tax, a 10% federal penalty tax typically applies to the earnings portion.

The rationale for taxing only the earnings and applying a penalty is that contributions to a 529 plan are made with after-tax dollars, meaning the principal amount is never taxed upon withdrawal. The penalty serves to discourage using the tax-advantaged account for non-educational purposes. State income taxes and potential recapture of previously claimed state tax deductions may also apply to non-qualified withdrawals.

There are specific exceptions to the 10% additional federal tax, though income tax on earnings usually still applies. These exceptions include the death or disability of the beneficiary, or if the beneficiary receives a tax-free scholarship. For scholarships, the penalty is waived up to the scholarship amount.

Other exceptions to the penalty include attendance at a U.S. military academy, where the penalty is waived up to the estimated cost of attendance. If funds are rolled over to another 529 plan for the same beneficiary or a qualifying family member within 60 days, no taxes or penalties are assessed. Responsibility for taxes and penalties usually falls to the account owner if funds are paid to them, or the beneficiary if paid directly.

Initiating a 529 Plan Withdrawal

Initiating a 529 plan withdrawal typically involves contacting the plan administrator, often through an online portal, by phone, or by submitting a physical form. Specific steps and required information may vary by plan, but common elements apply across most programs.

When requesting a withdrawal, account owners usually specify the amount and intended recipient. This includes the beneficiary’s name and account number, and if applicable, the educational institution’s details and student identification number. Ensure all information is accurate to avoid processing delays.

Common distribution options include direct payment to the educational institution, the beneficiary, or the account owner. Direct payment to the school can simplify record-keeping for qualified expenses. Withdrawals for K-12 tuition are often sent only to the account owner.

Processing times for withdrawals vary, typically three to ten business days for electronic transfers. Checks may take longer, often ten business days or more, plus mailing time. Submit withdrawal requests well in advance of payment deadlines, like tuition due dates, to ensure funds arrive on time.

Tax Reporting for 529 Withdrawals

After a 529 plan withdrawal, the plan administrator issues IRS Form 1099-Q, “Payments From Qualified Education Programs.” This form is typically sent by late January or early February of the year following the distribution. The 1099-Q reports the total gross distribution, earnings, and return of basis (contributions).

The recipient of the 1099-Q depends on who received the funds. If sent directly to the school, beneficiary, or student loan provider, the beneficiary receives the form. If sent to the account owner, the account owner receives it. This determines whose tax return the distribution might be reported on if taxable.

When preparing federal tax returns, individuals generally do not report 529 distributions if the entire withdrawal was used for qualified education expenses. In such cases, keep the 1099-Q with other tax records. However, if withdrawals exceed qualified expenses or are for non-qualified purposes, the taxable earnings portion must be reported as income.

The earnings portion of a taxable non-qualified withdrawal is reported on Schedule 1 (Form 1040) as “other income,” and any applicable 10% penalty on Schedule 2 (Form 1040). Maintaining detailed records and receipts for all qualified education expenses is important. These records substantiate appropriate use, should the IRS request verification.