Understanding 529 Withdrawal Rules

You Saved Smart—Now, Withdraw Smart, Too

Mom with daughter sitting at a desk reviewing what their 529 plan will cover of the costs
Photo: asiseeit / Getty Images

You’ve saved up for your kid's college for years, and the big day is finally here. It’s time to withdraw from your 529 Savings Plan. Withdrawing in the right way, and for the proper expenses, is critical if you want to make the most of the funds you’ve invested. Even if you’re not keen on studying the specific ins and outs of 529 withdrawals, there are a few things you need to know:

  1. There is a difference between qualified and non-qualified expenses.
  2. There are strategies or exceptions to allow non-qualified withdrawals without penalty.
  3. There are impacts in making a non-qualified withdrawal.

Understanding what happens when you withdraw from your 529 helps you properly plan for college and your child’s future.


You can always withdraw the money you originally invested, penalty-free. Only gains are subject to taxation and a 10% penalty if you've contributed after-tax money.

Where Can My 529 Plan Be Spent?

Your 529 plan has specific rules for spending in return for those 529 tax benefits and other advantages. You can spend the money you’ve saved on expenses directly related to your education costs, including:

Tuition and Fees

Tuition and fees for full and part-time students can be paid with 529 plans.

Room and Board

Whether you live on campus or off, you can use your 529 plan spending for your room-and-board expenses. The caveat here is that your off-campus housing costs can’t be higher than you’d pay to live on campus if you want to use 529 funds.

Required Textbooks and Supplies

The books listed in your course syllabus along with the supplies needed for class can be paid for with 529 plan funds.


A new computer or tablet, your internet service, and even a printer are covered when you need them for college.

Special Needs and Adaptive Equipment

Devices you need to navigate campus or attend class, participate in or listen to lectures are covered by 529 plan funds. While transportation is usually not covered, if you have special needs, your transportation needs may be covered expenses.

Remember that these expenses can be related to any educational institution that qualifies for federal financial student aid. That means it includes public and private institutions across the United States and even several abroad. It includes undergraduate institutions, graduate institutions, and even some trade schools.

Non-Qualified 529 Expenses

Your 529 savings are designed for college, but some expenditures do not qualify even if they relate to your time in school or your coursework. These uncovered, non-qualified expenses include:


Your 529 savings cannot be used for your car, bus, airfare, and gas expenses, even if you are using these to get to college.

Student Loan Costs

You can’t pay your student loans or loan interest with your 529 plan savings.

Sports or Activities

Fees for athletics, sports clubs, or school-sponsored groups or campus events can’t be paid with 529 plan funds.

Health Insurance

Medical expenses you incur while in school, and your health insurance can’t be paid with 529 savings.

529 Withdrawal Exceptions

While 529 withdrawal rules are fixed, there are ways to make non-qualified withdrawals without getting hit with that 10% penalty; these include:

  • The student beneficiary receives a scholarship
  • The student beneficiary dies
  • The student beneficiary enrolls in a U.S. service academy

You’ll still have to pay income taxes on gains in these circumstances unless you pay for a qualified expense. If you have multiple children, you can change the beneficiary of your 529 plan if one gets a scholarship or another exemption occurs.

If your oldest child wins a scholarship or decides to attend a U.S. service academy, you can withdraw your funds without penalty, though you will have to pay taxes on gains. If you simply switch the beneficiary to be one of your younger children, you will not have any penalties, and that child will receive the full amount of your 529 plan savings.

Strategies Before You Make a Non-Qualified Withdrawal

Since most non-qualified withdrawals are penalized, you should only do so after carefully examining all your options. In many cases, a better strategy is available that will allow you to keep more of the funds you’ve worked so hard to accumulate. Before you commit to a non-qualified withdrawal, consider the following.

  • Do you have other qualified expenses coming up? Paying for rent, books, and supplies would be a better option for these funds and won’t subject you to a penalty.
  • Will your child go on to grad school? If your child is heading to law, medical, or grad school, your 529 savings can usually be used for these expenses, too.
  • Can you choose another beneficiary? Switching your 529 plan savings to a younger child can help you save and jump-start that family member’s college savings.
  • Can you just withdraw from the principal? You can withdraw the amount you invested without penalty, but leave the growth in place to avoid being penalized.

Possible 529 Withdrawal Penalties

The most important thing to know about penalties and your 529 plan is that your principal can always be withdrawn without penalty. The money that grows over time is subject to penalties, though. Unlike normal investment accounts, the growth of your college accounts is treated and taxed as income and not capital gains.

If you remove funds for non-qualified expenses, then you’ll pay a 10% penalty on your gains. You’ll also be subject to income taxes on the gains and may even have to pay back any state income tax deductions you previously claimed.

Since penalties do exist for non-qualified withdrawals, fully understanding the differences between qualified and non-qualified expenses and taking steps to minimize your penalties before you withdraw will allow you to keep as much of your hard-saved investment as possible.

Ready to Withdraw?

The big day arrives after years of savings—so now what? You’ll start by deciding how much you need to withdraw for your qualified expenses. You should have an idea of how much will be needed after financial aid and any scholarships have been awarded.

Once you know how much you need, you need to decide who gets the funds. You can send funds directly to the college, add them to your own accounts for paying expenses or release the funds to your student (the beneficiary of the account). Save any bills, receipts, and other documentation for tax time.

Once the funds are released, you’ll need a completed Form 1099-Q from the IRS. This form is specifically for 529 plan spending and ensures your taxes are calculated accurately, and you are not subject to penalties. The 529 plan manager or custodian will complete this form and send the student, parent, and IRS a copy.

Frequently Asked Questions (FAQs)

What is a 529 plan?

A 529 plan is a tax-advantaged plan to pay for education expenses. A 529 plan can be a savings plan or a prepaid tuition plan. Savings plans grow tax-deferred, and you can invest the funds. Prepaid tuition plans allow you to pay in advance for tuition at designated colleges and universities.

What happens to 529 plan funds if they're not used for college?

If the funds aren't used for college, you could withdraw them and pay income taxes on the withdrawal and the 10% tax penalty on the gains. Alternatively, you could transfer the benefits to another beneficiary, like another child or grandchild who might use them for college, or use them to further your own education.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Department of Treasury. "Tax Benefits for Education," Page 52.

  2. IRS. "Tax Benefits for Education," Page 59.

  3. College Savings Plan Network. "We Owe Much to Our Veterans,"

  4. Fidelity. "How to Spend From a 529 College Plan,"

  5. College Savings Plan Network. "529 Plan Advantages & Benefits,"

  6. U.S. Securities and Exchange Commission. "Investor Bulletin: 10 Questions to Consider Before Opening a 529 Account,"

  7. IRS. "About Form 1099-Q, Payments from Qualified Education Programs (Under Sections 529 and 530),"

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