How to Withdraw Money From Your 529 Plan

A 529 plan is a dedicated savings vehicle for future education costs. These plans offer tax advantages, allowing savings to grow without federal income tax, and qualified withdrawals are also tax-free. Understanding the withdrawal process is important for account owners to access funds correctly and preserve tax benefits.

Understanding Qualified Education Expenses

Accessing funds from a 529 plan without incurring taxes or penalties hinges on using the money for what the Internal Revenue Service (IRS) defines as “qualified education expenses.” These expenses encompass a broad range of costs associated with eligible educational institutions. This includes tuition and required fees for enrollment or attendance at colleges, universities, vocational schools, or other post-secondary educational institutions that are eligible to participate in a student aid program administered by the U.S. Department of Education.

Beyond tuition, qualified expenses extend to books, supplies, and equipment necessary for enrollment or attendance. Room and board also qualify, provided the student is enrolled at least half-time in a degree or certificate program. For students living off-campus, the room and board expense cannot exceed the cost of attendance determined by the educational institution.

The definition of qualified expenses has expanded to include up to $10,000 annually per beneficiary for tuition at public, private, or religious elementary or secondary schools. Costs for eligible apprenticeship programs, including fees, books, supplies, and equipment required for enrollment or attendance, also qualify. A lifetime limit of $10,000 per beneficiary applies to payments of principal and interest on qualified education loans.

The Withdrawal Process

Initiating a withdrawal from a 529 plan involves a direct request to the plan administrator. Most plans offer several methods for requesting funds, including an online portal, phone call, or physical withdrawal form. Specific steps and options may vary by provider.

When making a withdrawal request, account owners need to provide key information. This includes the 529 plan account number, personal details, the beneficiary’s name and Social Security Number or Taxpayer Identification Number, and the exact withdrawal amount. Account owners also specify who the funds should be paid to, such as the educational institution directly, the beneficiary, or themselves.

The method of fund distribution can be selected, such as direct deposit or a physical check. Allow sufficient time for funds to disburse, as processing times range from a few business days to ten business days, plus mailing time for checks. Timing the withdrawal in the same calendar year as qualified education expenses are paid is important for tax reporting.

Tax Implications of 529 Withdrawals

Withdrawals from a 529 plan are tax-free at the federal level, and often at the state level, as long as they are used for qualified education expenses. This means contributions and earnings accumulated within the plan are not subject to federal income tax when used for eligible educational costs. This tax-free growth and withdrawal is a benefit of 529 plans.

If a withdrawal is not used for qualified education expenses, it is a non-qualified distribution. The earnings portion of the withdrawal becomes subject to the account owner’s ordinary income tax rate. A 10% federal penalty tax also applies to the earnings portion of non-qualified withdrawals.

Account owners receive Form 1099-Q, “Payments From Qualified Education Programs,” from their 529 plan administrator each year distributions are made. This form reports the total amount distributed, including earnings and principal portions. It is the account owner’s responsibility to determine the taxable portion by comparing distributions to qualified education expenses. Maintaining records of all qualified education expenses, such as tuition bills and receipts, is important to substantiate tax-free status if requested by the IRS.

Special Withdrawal Scenarios

There are specific situations where the 10% federal penalty tax on non-qualified 529 withdrawals is waived, although any earnings withdrawn are still subject to ordinary income tax. One exception applies if the beneficiary receives a tax-free scholarship; the penalty is waived up to the scholarship amount. If a beneficiary attends a U.S. military academy, the 10% penalty is waived on withdrawals up to the estimated cost of attendance for that institution.

Other circumstances that waive the penalty include the death or permanent disability of the beneficiary. In these instances, funds are withdrawn without the additional 10% penalty, though earnings remain taxable. Account owners also have the flexibility to change the beneficiary of the 529 plan to another eligible family member without incurring tax consequences.

A recent development, introduced by the SECURE 2.0 Act of 2022, allows for the rollover of unused 529 funds into a Roth IRA for the same beneficiary. This option, effective January 1, 2024, permits tax and penalty-free rollovers up to a lifetime limit of $35,000 per beneficiary. Certain conditions apply: the 529 account must have been open for at least 15 years, and contributions rolled over must have been in the account for a minimum of five years. The annual rollover amount is also subject to the prevailing Roth IRA contribution limits for the year, and the beneficiary must have earned income at least equal to the amount transferred.