How to Withdraw Money From a 529 Plan

A 529 plan is a savings vehicle designed to help individuals and families save for future education expenses. These plans offer tax advantages, allowing investments to grow tax-free and withdrawals to be tax-free when used for qualified education costs.

Understanding 529 Withdrawal Types

Withdrawing funds from a 529 plan requires understanding the distinction between qualified and non-qualified distributions. Qualified withdrawals are used for eligible educational expenses and are federal tax-free, often state tax-free. Non-qualified withdrawals are not.

Qualified education expenses include a range of costs associated with eligible educational institutions. These typically encompass tuition, fees, books, and supplies required for enrollment or attendance. Equipment like computers, software, and internet access, if primarily used for educational purposes, also qualifies.

Room and board expenses can be qualified if the student is enrolled at least half-time at an eligible institution. For on-campus housing, the actual amount charged by the school is considered qualified. For off-campus living, qualified room and board expenses are limited to the allowance included in the school’s cost of attendance.

A 529 plan can also cover up to $10,000 per student per year for K-12 tuition at public, private, or religious schools. Other K-12 expenses, such as curriculum materials, books, tutoring, and standardized test fees, may also qualify within this limit.

Expenses for registered apprenticeship programs, including fees, books, supplies, and equipment like required trade tools, are also qualified if the program is certified with the U.S. Department of Labor. Up to a $10,000 lifetime limit per individual can also be used from a 529 plan for student loan repayment, which can include the beneficiary’s loans or those of their siblings.

Non-qualified withdrawals occur when funds are used for expenses not defined as qualified education costs. The earnings portion of a non-qualified withdrawal is subject to ordinary income tax rates and a 10% federal penalty tax. The contribution portion is not taxed or penalized as it was made with after-tax dollars.

The 10% federal penalty tax on non-qualified withdrawals may be waived in specific situations, though the earnings portion remains subject to income tax. Exceptions include the death or disability of the beneficiary, or if the beneficiary receives a tax-free scholarship, up to the scholarship amount.

Information and Decisions for Withdrawal

Before withdrawing funds, gather necessary information and understand your plan provider’s procedures. Access your specific plan’s website or contact customer service to learn their requirements and available withdrawal methods.

You will need the 529 account number, along with the full name and Social Security Number or Taxpayer Identification Number of the beneficiary. Determine the exact withdrawal amount needed and its intended use, as this dictates whether the distribution is qualified or non-qualified for tax purposes. Aligning the withdrawal with expenses incurred in the same calendar year is also important to avoid potential tax issues.

Funds can be directed to different recipients, including the account owner, the beneficiary, or directly to the educational institution. For direct deposit, provide banking details like the account and routing number. For checks, a mailing address is required.

Maintain detailed records of all qualified education expenses, such as receipts, invoices, and tuition bills. This documentation is crucial for your personal records to substantiate the qualified nature of expenses in the event of an IRS audit. Keep these records for at least three years after the withdrawal.

Submitting a 529 Withdrawal Request

You can submit your withdrawal request using the plan provider’s online portal, by mail, or by phone. Each method has its own steps and processing times.

For online submissions, navigate to the withdrawal section on your plan provider’s website. Input the withdrawal amount, select the recipient, and provide payment details like bank account information for direct deposit. Review all entries for accuracy before submitting electronically.

If submitting by mail, download or request a withdrawal form from your plan provider. Complete the form with account and beneficiary details, withdrawal amount, and payment instructions. Mail the signed form to the provider’s designated address.

Some plan providers allow phone requests by contacting customer service and providing information verbally. Plan providers typically send a confirmation once the request is received.

Processing times vary, but funds generally arrive within 3 to 10 business days. During peak periods, processing may take longer, so submit requests with ample lead time. You can often track the status of your withdrawal through the plan provider’s online account portal.

Tax Reporting Post-Withdrawal

After a 529 plan withdrawal, you will receive Form 1099-Q, “Payments From Qualified Education Programs.” The 529 plan provider issues this form to the account owner or beneficiary by January 31st of the year following the withdrawal.

Form 1099-Q details the distribution. Box 1 shows the “Gross Distribution” (total withdrawn). Box 2 reports the “Earnings” portion (investment gains). Box 3 shows the “Basis” (original contributions). The sum of Box 2 and Box 3 equals Box 1.

If all distributions were used for qualified education expenses, Form 1099-Q is generally for informational purposes only, and no taxable income needs to be reported on your federal income tax return.

For non-qualified withdrawals, the “earnings” portion in Box 2 of Form 1099-Q must be reported as taxable income on Schedule 1 of Form 1040. The 10% federal penalty tax may also apply. The individual who received the non-qualified distribution is responsible for reporting it. Consulting a qualified tax professional for personalized advice is advisable due to the complexities of tax laws.