How to Use a 529 Plan to Pay for Tuition

A 529 plan serves as a tax-advantaged savings vehicle designed to help families finance education expenses. These plans are state-sponsored or offered by educational institutions, providing incentives to save for future costs. The primary benefit of a 529 plan lies in its potential for tax-free growth and tax-free withdrawals when funds are used for qualified education expenses.

Understanding Qualified Education Expenses

For 529 plan distributions to be federal income tax-free, they must be used for expenses deemed “qualified” by the Internal Revenue Service. This category primarily includes tuition and mandatory fees at eligible educational institutions, encompassing colleges, universities, and vocational schools that participate in federal student aid programs. Room and board costs also qualify if the student is enrolled at least half-time, with the allowable amount limited to the institution’s stated cost of attendance or the actual cost, whichever is greater. Necessary books, supplies, and equipment required for enrollment or attendance are also considered qualified expenses.

Beyond traditional college costs, qualified expenses have expanded to cover other educational pursuits. Up to $10,000 per year per beneficiary can be used for tuition at elementary or secondary public, private, or religious schools.

Starting July 5, 2025, this K-12 allowance further expands to include expenses like curriculum materials, books, online educational materials, and tutoring. The annual limit for all K-12 expenses will increase to $20,000 beginning January 1, 2026. Funds can also cover fees, books, supplies, and equipment for registered apprenticeship programs. Additionally, a lifetime maximum of $10,000 per beneficiary, and per sibling of the beneficiary, can be used for student loan repayment.

The 529 Plan Withdrawal Process

Initiating a withdrawal from a 529 plan begins by contacting the plan administrator (state-sponsored program or financial institution). Most plans offer various methods for requesting funds, including online portals, phone calls, or submitting paper forms. Requests usually require specific information. This includes the beneficiary’s name, the educational institution’s details, the type and amount of the expense, and your preferred payment method, such as direct deposit to a bank account or a check. If sending funds directly to a school, providing the beneficiary’s student identification number is often necessary.

Correct withdrawal timing is important to ensure tax compliance. Funds should be withdrawn in the same calendar year that the qualified education expenses are paid or incurred. For expenses paid earlier in the year, a “catch-up” distribution can be made later in the same calendar year to align the withdrawal with the expense. Plan processing times vary, ranging from a few days to several weeks. Submit requests with sufficient lead time, generally 10 business days before payment due dates. Maintaining records of qualified expenses (invoices, receipts, bank statements) and withdrawal confirmations is crucial for tax reporting and potential IRS verification.

Tax Considerations for 529 Withdrawals

One of the primary advantages of a 529 plan is that distributions used for qualified education expenses are free from federal income tax, and often from state income tax as well. If funds are withdrawn for purposes other than qualified education expenses, these non-qualified withdrawals carry tax implications. The earnings portion of a non-qualified withdrawal becomes subject to federal income tax at the account owner’s ordinary income tax rate. A 10% federal penalty tax also applies to these earnings, with exceptions for beneficiary death, disability, or scholarship receipt.

Plan administrators are required to issue Form 1099-Q, “Payments from Qualified Education Programs,” for any distributions made during the year. This form reports the total amount withdrawn, distinguishing between the principal (basis) and the earnings portion of the distribution. Account owners determine the taxable portion, if any, by comparing distributions to qualified expenses. You cannot claim education tax credits (e.g., American Opportunity Tax Credit, Lifetime Learning Credit) for expenses paid with tax-free 529 distributions, to avoid “double-dipping.” Families may consider paying some expenses out-of-pocket to maximize certain tax credits, then using 529 funds for other qualified expenses.

Coordinating 529 Plans with Financial Aid

A 529 plan can influence financial aid eligibility, as reported on the Free Application for Federal Student Aid (FAFSA). Parent-owned 529 plans are treated as parental assets, with a modest impact on financial aid calculations. Parental assets are typically assessed at a maximum of 5.64% in the Student Aid Index (SAI) calculation, formerly known as the Expected Family Contribution (EFC). In contrast, 529 plans owned directly by a dependent student are assessed at a higher rate, potentially reducing aid more significantly.

Qualified withdrawals from parent-owned or student-owned 529 accounts do not count as income on the FAFSA, helping maintain financial aid eligibility. For 2024-2025 FAFSA and beyond, grandparent or relative-owned 529 assets and qualified distributions are no longer reported, eliminating their impact on federal aid. When a student receives scholarships or other tax-free aid, it is strategic to use those funds first for tuition and other qualified expenses. This approach helps avoid potential non-qualified withdrawals from the 529 plan, or allows for 529 withdrawals up to the amount of the scholarship to cover other qualified expenses, preventing any penalties on that portion. Despite their influence on financial aid calculations, the tax advantages and flexibility of 529 plans often outweigh their minimal impact on aid, making them a valuable tool for education savings.