Email FacebookTwitterMenu burgerClose thin

529 Plan Withdrawals: Here’s Everything You Need to Know


After years of investing in your children’s college education, you’re ready to reach into your 529 college savings plan and send your kid off to the best years of his or her life. But while making 529 plan withdrawals is as simple as clicking a few buttons, the consequences are complex. Missteps could trigger tax penalties. So you should consider a few points before you tap into your savings. Below, we’ll walk you through the process of making 529 plan withdrawals the right way. You’ve worked hard for your savings. Now it’s time for your 529 plan to work for you and your children.

A financial advisor can help you create a financial plan for your child’s future education.

What to Do Before Making a 529 Plan Withdrawal

Unlike with a 401(k) plan, you can withdraw as much as you want from your 529 plan at any time. However, your 529 plan withdrawal could hit you with severe tax penalties if you use it on nonqualified expenses.

Your 529 college savings plan covers qualified educational expenses tax-free. And while the IRS is generally loose with what it defines as a qualified expense, you should know exactly what you can safely use your 529 plan withdrawals on. View some examples below:

  • Tuition and mandatory fees at eligible schools
  • Books and other materials your beneficiary requires for taking courses
  • Electronic equipment such as computers, printers, educational software and internet access required for enrollment
  • Special needs equipment disabled students need to attend classes

You can also use your 529 plan money to fund room and board for a beneficiary enrolled at least half time. However, the price you pay can’t exceed the estimated costs of on-campus housing determined by the college. You can usually get this information from the school’s financial aid office or its website. Remember, you can use your 529 plan money in conjunction with financial aid packages and scholarships your child earns. So don’t stop taking steps to getting more financial aid.

Both of these options – financial aid coupled with your 529 plan – can help you close the college-costs gap, as a 529 plan won’t always cover everything off.

Understand What Counts as a Nonqualified Withdrawal

However, the IRS doesn’t view all educational expenses as qualified. The following lists some expenses that you can’t cover with your 529 plan money without incurring tax:

  • Fees related to school-sponsored clubs, even if they’re educational
  • Electronics that can have an educational function but are primarily used for entertainment
  • Health insurance policies issued by the school
  • Transportation to and from campus
  • Student loans

If you’re still pondering whether your 529 plan can fund an expense without throwing you in a tax hole, you can always reach out to the financial aid office at the school your child attends. A representative can tell you about costs for the academic year as well as what your 529 plan can tackle tax-free.

You should also find a financial advisor to discuss how best to use your funds and how to make 529 plan withdrawals. 529 plan benefits are vast, but even account holders aren’t fully aware of all the perks. An advisor can help you identify the ones that would work the most to your advantage.

What Are the Tax Penalties for Nonqualified Withdrawals?

SmartAsset: 529 Plan Withdrawals

529 plan withdrawals become problematic when don’t use the funds on qualified educational expenses.  When you make a nonqualified withdrawal, the earnings portion of it will be subject to federal income tax and a 10% penalty. What is the earnings portion?

That depends on how much your account grew before you made a nonqualified withdrawal. Say you’ve contributed $14,000 and your account balance climbed to $20,000. In this case, your contributions make up 70% of the balance. The remaining 30% makes up your earnings.

Let’s say you make a $10,000 nonqualified withdrawal. You’ll owe taxes on 30% of that, or $3,000. The cut equals your federal income tax bracket plus a 10% penalty. So if you’re in the 24% bracket, you’d owe 34% of taxes on those $3,000.

Depending on state law where you pay your taxes, you may also have to pay back tax deductions you claimed based on your contributions.

You should seek a certified public accountant (CPA) in your area to discuss the potential impact of a nonqualified withdrawal based on your individual situation. Your advisor should also recommend alternatives to tapping into your child’s college fund.

In some cases, however, you can waive the 10% penalty. For example, say your child earns a partial scholarship. The IRS permits you to take a nonqualified withdrawal in the amount of the tax-free scholarship penalty free. The same scenario applies when your child attends a U.S. Military Academy.

However, you may still owe federal income tax and state taxes on the earnings portion of your 529 plan withdrawals.

How Do You Make 529 Plan Withdrawals?

Now that you know what you can comfortably pay with your 529 plan withdrawals, you’re ready to take your money out. The hard part is over. Making a 529 plan withdrawal takes a few minutes on your computer. Just log on to your account and request a withdrawal.

Most plans can send checks or electronic payments to you, your beneficiary or the school you’re funding. You should have the following information at hand.

  • Bank account and routing numbers
  • Your beneficiary’s banking information (if that’s where you’re directing your funds)
  • Your child’s student ID number if making a payment to the school

Bottom Line

SmartAsset: 529 Plan Withdrawals

Making 529 plan withdrawals is simple. However, you should consider taking certain steps before touching your savings. Move forward only after you know exactly what you owe for the academic year and what your 529 plan can cover without slapping you with a tax penalty.

Tips for Making a 529 Plan Withdrawal

  • Seek help from a financial advisor to help you make the most out of your savings. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Don’t forget to keep looking for places to find partial scholarships and filling out the free application for federal student aid (FAFSA) each year. Having a 529 plan account doesn’t prevent you from using scholarships and financial aid to pay for college.

Photo credit: ©, ©,  ©