When You Withdraw From a 529 Plan: What Gets Taxed and What Doesn't

How 529 distributions are taxed depends on what you spend the money on

A may have access to distribution from a 529 plan — money spent on may be able to access education expenses — is not taxed at the federal level and usually not taxed by your state either. The earnings grow tax-free, and you withdraw them tax-free, as long as you use the money for things the IRS allows.

If you withdraw money and spend it on something other than may be able to access expenses, the earnings portion of that withdrawal is taxed as ordinary income, plus you owe a 10 percent federal penalty on those earnings. The money you originally contributed comes out tax-free no matter what you do with it — you already paid tax on that when you earned it.

The key to avoiding tax is matching your withdrawal to an may be able to access expense in the same year. If your child's tuition bill is $15,000 and you withdraw $15,000, there is no tax calculation at all. If you withdraw $20,000 and only spend $15,000 on tuition, the extra $5,000 triggers tax and penalty on its earnings portion.

Key Takeaways

• Withdrawals used for tuition, fees, room and board, books, computers, and required equipment are not taxed if the student is enrolled at least half-time at an accredited school.
• Withdrawals for K-12 tuition (up to $35,000 per student over the account's lifetime) and up to $35,000 rolled into a Roth IRA are also tax-free.
• Money withdrawn but not spent on may be able to access expenses is taxed on the earnings portion at your ordinary income tax rate, plus a 10 percent federal penalty.
• You can avoid the penalty (but not the tax) on non-may have access to earnings if the student receives a scholarship equal to the amount withdrawn.
• The account owner, not the student, is responsible for reporting and paying tax on non-may have access to distributions.

What counts as a may have access to education expense

The IRS maintains a specific list of expenses that do not trigger tax when you withdraw 529 money to pay for them. For college and graduate school, these include tuition and mandatory fees, room and board (if the student is enrolled at least half-time), books, supplies, equipment, and a computer or internet access if required by the school.

Room and board has a ceiling: you can withdraw up to the school's published cost of attendance figure, which includes an allowance for housing. If your child lives at home and the school's cost of attendance assumes on-campus housing, you cannot withdraw the full housing allowance — only what the school actually charges for the housing option your child uses.

Expenses that do not count include transportation, insurance, meal plans beyond room and board, student loan repayment, and tutoring or test prep. If you are unsure whether a specific expense qualifies, the school's financial aid office can tell you whether it appears on their cost of attendance budget.

The tax and penalty on non-may have access to withdrawals

When you withdraw money that you do not spend on may be able to access expenses, the IRS taxes only the earnings portion, not your original contribution. If you contributed $50,000 and the account has grown to $65,000, the $15,000 in earnings is what gets taxed and penalized.

The earnings are taxed at your ordinary income tax rate — the same rate you pay on wages or other income. On top of that, you owe a 10 percent federal penalty on the earnings amount. So if you are in the 22 percent tax bracket and withdraw $15,000 in earnings for a non-may have access to expense, you pay $3,300 in federal tax (22 percent) plus $1,500 in penalty (10 percent), for a total of $4,800. Your state may also tax the earnings.

You report the non-may have access to distribution on Form 1099-Q, which the plan administrator sends to you and the IRS. You then report it on your tax return. The account owner is responsible for the tax, not the student, even if the student is the one who received the money.

When the 10 percent penalty does not apply

The penalty is waived — though not the income tax — if the student receives a scholarship in the same year as the non-may have access to withdrawal. You can withdraw money penalty-free up to the scholarship amount. The tax on the earnings still applies, but the 10 percent penalty does not.

For example, if your child receives a $10,000 scholarship and you withdraw $12,000 from the 529 for non-may have access to expenses, the first $10,000 avoids the penalty. The remaining $2,000 is subject to both tax and penalty on its earnings portion. You must report the scholarship amount to the plan administrator or claim the penalty waiver on your tax return.

The penalty also does not apply if the student attends a U.S. military academy, where education is free. Some states offer additional penalty waivers for specific circumstances, such as the student's death or disability, so check your state's rules.

K-12 tuition and the $35,000 Roth conversion

Money withdrawn for private K-12 tuition is treated as a may have access to distribution and is not taxed, up to $35,000 per student over the account's lifetime. This is a per-student limit, not per year, so if you withdraw $10,000 in one year and $8,000 in another, you have $18,000 remaining of your $35,000 lifetime allowance for that child.

Beginning in 2024, you can also roll up to $35,000 from a 529 plan into a Roth IRA in the account owner's name, tax-free. The money must have been in the 529 for at least 15 years, and the annual rollover is limited to the Roth IRA contribution limit for that year. This is a one-time opportunity per beneficiary, and it does not count against the $35,000 K-12 limit.

How to avoid tax: matching withdrawals to expenses

The simplest way to avoid tax is to withdraw only what you actually spend on may be able to access expenses in the same calendar year. If your child's spring semester tuition is due in January and you withdraw the money in January to pay it, there is no tax calculation — the withdrawal is may have access to by definition.

Keep records of what you spent the money on. The plan administrator does not police this; they send you a 1099-Q reporting the withdrawal amount. You are responsible for determining whether it was may have access to. If you are audited, the IRS will ask to see the bills and proof of payment.

If you have leftover money in the account after your child finishes school, you have several options: roll it to another family member (a sibling, cousin, or even a grandchild), roll it to a Roth IRA if the 15-year rule is met, or withdraw it and pay tax and penalty on the earnings. Some families deliberately leave money in the account for a younger child's future education rather than withdrawing it.

State tax treatment of 529 distributions

Most states do not tax may have access to 529 distributions, but a few do. New Jersey taxes the earnings portion of may have access to distributions at the state level, even though they are not taxed federally. A handful of other states have specific rules, so check your state's tax authority website or ask your tax preparer whether your state taxes 529 withdrawals.

Some states offer an income tax deduction or credit for contributions to a 529, but that is separate from how they tax distributions. You might get a deduction when you put money in and still owe state tax when you take it out, or vice versa.

Frequently Asked Questions

Do I have to spend the 529 money in the same year I withdraw it?

No. You can withdraw money in one year and spend it on may be able to access expenses in the same year, and that is what matters for tax purposes. The withdrawal date and the expense date must be in the same calendar year, but you do not have to pay the bill immediately after withdrawing.

What happens if my child gets a scholarship and I have already withdrawn from the 529?

You can claim a penalty waiver on your tax return for the scholarship amount, but you must do so when you file. The plan administrator does not automatically adjust your tax reporting. Keep the scholarship letter and report the waiver on Form 5329 when you file your taxes.

Can I withdraw money for my child's living expenses if they live off-campus?

Only if the school's cost of attendance budget includes an allowance for off-campus housing. If your child lives with you rent-free, you cannot withdraw the housing portion. The school's financial aid office can tell you what housing costs they use in their budget.

If I withdraw too much money by accident, can I put it back?

Yes, but only within 60 days. You can return the excess to the 529 plan, and it will not be treated as a non-may have access to distribution. After 60 days, you cannot reverse the withdrawal, and any earnings portion is subject to tax and penalty.

Who pays the tax if the student is over 18 and the account is in my name?

You do, the account owner. Even if your adult child receives the money or spends it themselves, you report the distribution on your tax return and pay any tax and penalty owed. The student does not report it on their return.