Edmit logo

Is There a Penalty for Withdrawing from My 529 Plan?

Featured Stories

Filter By Categories

529 College Savings Plans are tax-advantaged investment accounts for educational expenses including K-12 and post-secondary institutions. As long as you follow the guidelines, there are no penalties associated with the account. However, withdrawing money from the account for an ineligible expense can result in a penalty.


529 Savings Plan Withdrawal Penalty

There is a 10% penalty for withdrawing from a 529 plan for an expense other than eligible costs as outlined below. Note that the penalty applies to the earnings, not the contributions you have made. Also, that earned interest is considered taxable income, and the account holder is responsible for paying both federal and state taxes (if applicable) on the withdrawal. There are four cases in which a penalty may be avoided:


Note: In all of the exceptions below, it’s essential to remember that earnings on the withdrawal are still considered taxable income. The account holder must pay income taxes on all withdrawals, even in the above circumstances.


Scholarship

If the 529 plan beneficiary earns a scholarship, the account holder withdraw funds up to the amount of the scholarship penalty-free. For example, if a student receives a $20,000 scholarship and there is $100,000 in the 529 plan, the account holder may withdraw $20,000 penalty-free.


Military Academy

If the beneficiary attends a military academy, the account holder can withdraw from the account penalty-free.


Disability

In the event of disability, the account holder can withdraw from the account penalty-free. You can also convert the account to an ABLE account, a type of tax-advantaged account for individuals with disabilities and special needs. ABLE accounts do not affect a beneficiary’s access to Medicaid. However, if the ABLE account balance exceeds $100,000, SSI/SSDI benefits may be suspended until the account balance is below that limit.


Death

If the beneficiary of a 529 plan dies, the account holder can withdraw from the account without penalty.


Eligible Expenses for a 529 College Savings Plan

K-12 Expenses

The Tax Cuts and Jobs Act made 529 plans available for limited use for kindergarten through 12th grade tuition at private and non-public schools. Each year, up to $10,000 in a 529 College Savings Plan can be used to pay K-12 tuition and applicable expenses without fees.


College and University

Tuition, fees, books, computers/laptops, other equipment, and room and board for half-time and full-time students are considered eligible education expenses for 529 plans. Personal expenses and transportation fees are not qualified expenses. Any distribution used to pay eligible expenses is not subject to a penalty.


Post-Secondary Education

Though the account is called a 529 College Savings Plan, the 529 plan can be used to pay for a variety of post-secondary education opportunities including certificate programs, trade and vocational schools, and community college. The Department of Education School Search website contains a list of schools eligible to participate in federal financial aid programs. These schools are also eligible for 529 College Savings Plans. There are a variety of educational programs including massage therapy, cosmetology, and golf academy training that meet requirements for the 529 College Savings Plan.


Ineligible Expenses Are Subject to Penalties

If you exceed your Qualified Higher Education Expense (QHEE) or use the 529 plan to purchase ineligible expenses, such as transportation or insurance costs, you may be subject to a penalty. The penalty is 10% plus income tax on accrued earnings. The best way to avoid penalties is to only spend on eligible expenses. If you have any doubts, contact the school's financial aid office or your plan administrator to discuss how to appropriate funds.


Alternatives to Withdrawing Funds

If you are thinking about withdrawing funds because the beneficiary is no longer attending college, you do have other options to avoid a penalty. The account can be transferred to a family member (including parents and grandparents) to use for continuing education or a degree program. The 529 plan can be rolled into another 529 plan for a sibling, or you can hold the funds in case the beneficiary decides to attend college in the future.

 

529 College Savings Plan do not have a time limit or expiration date. If you have contributions in a 529 account that will not be used by the beneficiary, consult a tax professional before making a withdrawal. It is possible you may qualify for an exception, or be able to transfer funds without incurring a penalty.

Sign up for updates

Popular Tags

Financial Aid and Scholarships* paying for college financial aid Cost of College* grants and scholarships FAFSA Student Loans* Saving for College* federal student loans college tuition cost of attendance 529 plan college financial planning financial aid award expected family contribution private student loans taxes room and board college savings plan on-campus housing college applications application fees merit-based financial aid private universities public universities student loan assistance college expenses federal financial aid merit scholarships Salary and Career* budgeting for college edmit hidden gems tuition discount financial need parent PLUS loan southern colleges CSS profile college costs edmit team education expenses living expenses western colleges financial aid appeal income midwestern colleges off-campus housing affordable college college majors loan forgiveness northeast colleges application fee waivers degree programs edmit scholarship institutional aid loan repayment new england colleges choosing a major net price prepaid tuition plans work-study SAT career choosing a college in-state tuition international students need-based financial aid need-blind colleges private scholarships qualified higher education expenses repayment plans tuition guarantee 401k ACT UGMA UTMA budget college ranking systems discretionary income education savings accounts fees free tuition full ride scholarship grants great lakes region colleges health insurance options investment ivy league schools meal plans mid-east region colleges need-aware colleges plains region colleges rocky mountain schools southeastern colleges southwestern colleges student loan debt tuition payment plans 568 presidents group Inversant MEFA applying to college asset protection allowance best price campus life college advisor college deposit college search college spending concurrent enrollment cost by region cost by state crowdfunding educational expenses esports fee waivers financial literacy fraternities and sororities full tuition gap year home equity loan income share agreements internships liberal arts degree line of credit medical expenses military benefits out-of-state students out-of-state tuition percent need met private college consultant retirement savings saving school-based scholarships small business standardized testing state aid state schools student bank accounts student organizations title IV schools travel expenses tuition decreases tuition increases tuition reciprocity undocumented students