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A 529 college savings plan is one of the best tools for funding education, but using the money incorrectly can lead to unexpected taxes and penalties. Whether you’re paying for tuition, books, or other college-related expenses, it’s important to understand how withdrawals work. Making even a small mistake — like using the funds on ineligible expenses or exceeding spending limits — can reduce your savings. Here are key tips to help you avoid 529 withdrawal penalties and make the most of your education funds.
Key Points
• A 529 plan offers tax advantages for saving for college, but using funds for nonqualified expenses can result in penalties.
• Qualified education expenses include tuition, fees, room/board, books, supplies, computers, internet, and K-12 tuition.
• Nonqualified expenses include travel, extracurriculars, and health insurance.
• The 10% penalty may be waived in certain situations, such if the beneficiary receives a scholarship.
• If your child doesn’t attend college, you can change the beneficiary, use the funds for trade school, or roll funds into a Roth IRA.
What Is a 529 Plan?
A 529 plan offers a tax-advantaged way to save for a child’s future college expenses. You can make contributions to the 529 account, which can then be invested in a variety of assets (such as stocks, bonds, or mutual funds), and any earnings grow tax-free. You can make withdrawals from a 529 federal income tax-free if the funds are used for qualified education expenses.
If you withdraw money from a 529 and spend it on nonqualified expenses, you’ll pay ordinary income tax on any earnings, plus a 10% penalty. There are some exceptions — such as no penalty if your student receives a scholarship and you withdraw up to that amount from the 529, though you’ll still need to pay tax on the earnings.
💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.
What Are Qualified 529 Plan Distributions?
Education expenses that are considered qualified within a 529 plan include:
• College tuition and fees
• Room and board (not to exceed the allowance for room and board included in the school’s cost of attendance)
• Books and supplies
• Computers and internet
• K-12 tuition and expenses (up to $10,000 in per year, increasing to $20,000 per year starting on January 1, 2026)
• Student loan payments (up to $10,000 per beneficiary)
• Apprenticeship programs registered with the U.S. Department of Labor
What Are Nonqualified 529 Plan Distributions?
Some expenses you’ll encounter when your child goes to college, however, are considered nonqualified distributions. Withdrawing funds from your 529 to cover these expenses can trigger taxes and penalties:
• Transportation costs
• Sports expenses or monthly gym dues
• Electronics and smart phones
• Health insurance costs
• Off-campus room and board in excess of what the school housing would cost
• Costs associated with extracurricular activities
• Fratnerity/sorority dues
Are Distributions Taxable?
Qualified withdrawals are federal income tax-free (and in some states, state income tax-free) as long as your total withdrawals for the year don’t exceed your child’s higher education expenses.
If distributions are used to cover nonqualified expenses (such as travel to and from college or entertainment expenses), any part of the distribution that is made up of earnings on contributions will be taxed as ordinary income and could also incur a 10% federal penalty.
What Is a 529 Early Withdrawal Penalty?
A 529 withdrawal penalty is an additional 10% federal tax imposed on the earnings portion of a withdrawal from a 529 plan if the funds are used for nonqualified educational expenses. This penalty is levied on top of standard income tax, which is also applied to the earnings. The original contributions to the 529 are made with after-tax dollars and are not subject to the penalty or income tax upon withdrawal.
Keep in mind, however, that there’s no early 529 withdrawal penalty like with retirement accounts. Funds can be withdrawn at any time penalty-free, provided they are used for qualified education expenses. They can also remain in the account indefinitely if not immediately needed, continuing to grow tax-deferred.
Recommended: Benefits of Using a 529 College Savings Plan
Can I Make a Withdrawal From 529 Without Penalty?
Yes, you can make a withdrawal from a 529 without penalty so long as you use the funds for qualified education expenses. In addition, the 10% penalty may be waived in certain situations.
529 Withdrawal Penalty Exceptions
Here are some scenarios where the 10% penalty won’t apply (though taxes still will):
• The beneficiary dies or becomes disabled.
• The beneficiary attends a United States military academy
• The qualified education expenses were only taxed because the student or parents claimed the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC).
• The beneficiary received nontaxable educational assistance, including college scholarships, fellowship grants, veterans’ educational assistance, and employer-provided educational assistance.
What if My Child Doesn’t Go to College?
If you’ve been saving for a child’s college education and they decide not to go to college, there are some other ways you use your 529 funds that won’t trigger taxes and penalties. Here are some options to consider:
Change the Beneficiary
When you open a 529 plan, you designate a beneficiary, which is the person whose education you’re saving for. However, that name isn’t set in stone — you can change the beneficiary at any time.
If the child you’re investing for decides not to go to college (or gets a significant scholarship), you can change the beneficiary to a younger child, yourself, or even a future grandchild. Alternatively, you can also simply leave the account, let it grow, and change the beneficiary at a later date.
Trade School or Apprenticeships
If your child decides they want to attend a trade school or apprenticeship program rather than go to a traditional college, you can use 529 funds to cover those costs (without paying any taxes or penalties), provided the institution participates in federal student aid programs or is registered with the Department of Labor.
Repay Student Loans
As a result of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, 529 plan holders can make penalty-free withdrawals to pay off student loan debt (both federal and private) for the designated beneficiary, up to a lifetime maximum of $10,000 per person. You can also change the beneficiary multiple times to help pay down student debt for more than one family member.
Roll the Funds to a Roth IRA
Thanks to SECURE 2.0, passed at the end of 2022, you can make tax- and penalty-free rollovers to a Roth IRA, giving your beneficiary’s retirement savings a substantial head start. However, there are some conditions and limitations to keep in mind:
• The 529 must have been open for at least 15 years.
• Contributions made within the last five years aren’t eligible.
• There is a $35,000 lifetime limit per beneficiary.
• Rollover amounts are subject to annual Roth IRA contribution limits.
• The Roth IRA must be in the beneficiary’s name
Other College Financing Options
If you don’t have enough funds in your 529 to fully pay for a child’s college education, there are still many ways to cover the costs. Here are some to explore:
• Maximize financial aid: The first step is for the student to complete the Free Application for Federal Student Aid (FAFSA®) every year they are in school. The FAFSA determines eligibility for grants, work-study programs, and federal loans. Many schools also use FAFSA data to award their own institutional aid.
• Research scholarships: Many private organizations, nonprofits, and community groups offer college scholarships. They may be awarded based on merit (such as academic, athletic, or artistic abilities) or financial need. Have your child search local community groups and online databases for various scholarship opportunities.
• Borrow wisely: Federal student loans are often the best option for borrowing, as they typically offer lower interest rates and more flexible repayment options than private loans. If additional funding is needed, private student loans are an option, but your student may need a cosigner to get approved or secure a better interest rate.
💡 Quick Tip: Parents and sponsors with strong credit and income may find more-competitive rates on no-fees-required private parent student loans than federal parent PLUS loans. Federal PLUS loans also come with an origination fee.
The Takeaway
A 529 plan can be an excellent way to save for college, offering tax advantages for qualified educational expenses. However, it’s important to understand what constitutes a qualified withdrawal to avoid penalties and taxes on the earnings. If your child’s plans change, options like changing the beneficiary, using funds for trade schools or apprenticeships, and repaying student loans can help you utilize your savings without incurring penalties. By being aware of the rules and exceptions, you can maximize the benefits of your 529 plan and use your educational savings effectively.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
How do I withdraw from a 529 without paying a penalty?
You can withdraw from a 529 plan without paying a penalty by using the funds for qualified education expenses. These include tuition, fees, room and board (up to the school’s allowance), books, supplies, computers, internet, and K-12 tuition.
The 10% federal penalty may also be waived in specific situations, such as the death or disability of the beneficiary, attendance at a U.S. military academy, or if the beneficiary received nontaxable educational assistance, such as scholarships or fellowship grants, and you withdraw up to that amount. In these cases, however, you may still owe ordinary income tax on the earnings portion of the withdrawal.
What is the 529 loophole?
The “529 loophole” typically refers to the “grandparent loophole.” As a result of changes to the Free Application for Federal Student Aid (FAFSA®) in 2024–2025, studentsno longer need to report distributions from a grandparent-owned 529. As a result, grandparent support won’t impact a student’s eligibility for financial aid. Another popular 529 “loophole” (made possible by the SECURE 2.0 Act) allows unused 529 plan funds to be rolled over into a Roth IRA for the beneficiary, though restrictions and limitations apply.
What are the exceptions to the 529 withdrawal penalty?
The 10% federal penalty for nonqualified 529 withdrawals can be waived in several situations. These include the death or disability of the beneficiary and the beneficiary attending a U.S. military academy. Also, if the beneficiary received nontaxable educational assistance (such as scholarships, grants, or employer-provided educational assistance) and you withdraw up to that amount, the penalty will not apply. However, in these cases, ordinary income tax on the earnings portion of the withdrawal may still be owed.
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