IRS 529 Plans: Questions and Answers

A 529 plan is an investment account with tax advantages for education savings. These plans allow savings to grow free from federal taxes, and withdrawals for qualified costs are also tax-free. While sponsored by states or educational institutions, the Internal Revenue Service (IRS) provides the governing framework. These regulations determine how funds can be contributed, what constitutes a qualified expense for a tax-free withdrawal, and the consequences of using the money for other purposes.

Contribution Rules and Gift Tax Implications

The IRS defines contributions to a 529 plan as completed gifts to the beneficiary, making them subject to federal gift tax rules. For 2025, an individual can contribute up to $19,000 to a beneficiary’s 529 plan without incurring gift tax. A married couple can jointly give up to $38,000 to the same beneficiary. Because these rules apply on a per-donor, per-beneficiary basis, a person can give up to the annual exclusion amount to multiple beneficiaries. State-sponsored 529 plans also have their own aggregate contribution limits, which represent the total amount that can be held for a single beneficiary and often exceed several hundred thousand dollars.

A feature of 529 plans is the ability to accelerate five years of gifts into a single year. This allows a contributor to make a lump-sum payment of up to five times the annual gift tax exclusion at once. In 2025, an individual can contribute up to $95,000, and a married couple can contribute up to $190,000 jointly. To use this five-year front-loading option, the contributor must file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, for the year the contribution is made. By filing, the contributor agrees not to make additional gifts to that beneficiary for the next four years, as any further gifts during that period would be subject to the gift tax.

Defining Qualified Education Expenses

The ability to withdraw funds tax-free is limited to distributions used for qualified education expenses (QEE). The IRS definition of QEE has expanded to cover various stages and types of education.

Higher Education

For postsecondary education, QEE includes costs required for enrollment or attendance at an eligible institution, which is any school that can participate in federal student aid programs. This covers tuition, mandatory fees, books, supplies, and required equipment. Room and board costs are qualified only if the student is enrolled at least half-time. The amount for housing is limited to the school’s official cost of attendance allowance or the actual amount charged for university-owned housing, whichever is greater. Expenses like travel and transportation are not considered qualified.

K-12 Education

A plan owner can withdraw up to $10,000 per beneficiary, per year, for tuition at a public, private, or religious K-12 school. This $10,000 limit is an aggregate annual cap across all 529 accounts for a single beneficiary. This provision allows families to use the tax-advantaged growth for earlier educational needs.

Apprenticeship Programs

Funds can be used for expenses related to certain apprenticeship programs registered and certified with the U.S. Secretary of Labor. Eligible expenses for these programs include required fees, books, supplies, and equipment.

Student Loan Repayment

A lifetime limit of $10,000 can be withdrawn from a 529 plan to repay the principal or interest on a qualified education loan. This benefit applies to the loans of either the 529 beneficiary or their siblings. If 529 funds are used to pay student loan interest, that same interest cannot also be claimed for the student loan interest deduction on a federal income tax return.

Taxation of Non-Qualified Distributions

A withdrawal from a 529 plan for any reason other than a qualified education expense is a non-qualified distribution. This triggers tax consequences on a portion of the withdrawn funds to recapture the benefits of tax-deferred growth.

Only the earnings portion of a non-qualified distribution is subject to tax and penalty, as contributions are returned tax-free. To determine the taxable amount, the plan administrator calculates the pro-rata share of earnings in the withdrawal. For example, if an account with $20,000 consists of $15,000 in contributions and $5,000 in earnings, 25% of any distribution is considered earnings. A $4,000 non-qualified distribution would result in $1,000 of taxable income.

Taxable earnings are included in the recipient’s gross income and taxed at their ordinary income tax rate. These earnings are also subject to an additional 10% federal penalty tax. Many states also impose their own income tax and potentially a penalty on the earnings portion of a non-qualified withdrawal.

The IRS waives the 10% penalty in certain situations, though ordinary income tax on earnings still applies. The penalty is waived for withdrawals made due to the beneficiary’s death or disability. It is also waived for withdrawals up to the amount of a tax-free scholarship, a veteran’s educational assistance allowance, or other tax-free educational payments received by the beneficiary.

Managing Plan Changes and Leftover Funds

The IRS provides several tax-free options for plan owners to adapt to changing circumstances. These provisions allow the funds to maintain their tax-advantaged status while being repurposed for a new beneficiary or a different savings goal.

Changing the Beneficiary

A plan owner can change the designated beneficiary of a 529 account at any time without tax consequences if the new beneficiary is a “member of the family” of the original. The IRS defines this broadly to include the beneficiary’s spouse, children, grandchildren, siblings, parents, grandparents, nieces, nephews, and first cousins.

Plan-to-Plan Rollovers

An account owner can move funds from one 529 plan to another for the same beneficiary once within any 12-month period. This rollover is tax-free. Funds can also be rolled over to a 529 plan for a new beneficiary who is a qualifying family member of the original.

Rollover to a Roth IRA

A change introduced by the SECURE 2.0 Act allows for tax-free rollovers from a 529 plan to a Roth IRA for the beneficiary, subject to several conditions. The 529 account must have been open for at least 15 years, and contributions being rolled over must have been in the account for more than five years. The amount rolled over annually is subject to that year’s Roth IRA contribution limit. There is a lifetime maximum of $35,000 per beneficiary that can be moved from a 529 plan to a Roth IRA.

Tax Reporting for 529 Plans

When distributions are taken from a 529 plan, the administrator issues Form 1099-Q to the recipient. This form details the gross distribution in Box 1, the earnings portion in Box 2, and the contribution basis in Box 3. How this information is reported to the IRS depends on how the funds were used.

If the gross distribution is less than or equal to the beneficiary’s adjusted qualified education expenses, the distribution is tax-free. It does not need to be reported on the recipient’s federal income tax return. The recipient should keep records of the qualified expenses to substantiate the withdrawal if the IRS inquires.

If a distribution is non-qualified or exceeds qualified expenses, the earnings portion must be reported as income on Schedule 1 of Form 1040. The additional 10% penalty on those earnings is calculated on Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. The resulting penalty is then carried over to Schedule 2 of Form 1040.