It’s time! Using your 529 education savings plan account

You may not feel emotionally ready for your child to leave the nest, but you’re better prepared financially, thanks to your 529 savings plan. You’ve been smart about saving; now be smart about how you spend that money.

Key takeaways

  • Know the rules for 529 savings plan withdrawals.
  • Think about how and when you’ll access the money.
  • Avoid withdrawals for nonqualified expenses. 

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How to be smart about spending what you've saved

The rules for 529 savings plan withdrawals are easy to navigate with a little preparation. Know the basics to ensure a smooth path for you (the account owner) and your child (the beneficiary).

Keep the tax benefits going

Any earnings in your 529 savings plan are exempt from federal taxes. As long as you use the money for qualified education expenses within the payment year, the withdrawals won’t be taxable either. State tax treatment varies.

Withdraw funds in three steps

The Internal Revenue Service (IRS) term that you need to know is QEE, which stands for “qualified education expense.” Your 529 savings plan withdrawals will be free from federal tax as long as they’re used for QEEs, such as room and board, tuition, required books and supplies for higher education. There's also the option to pay for K-12 tuition (up to $10,000 a year per student). The cost of certain apprenticeship program expenses is another QEE.

You can even use 529 assets to pay for certain student loan expenses, up to a $10,000 lifetime maximum.

Using the money for nonqualified expenses could cost you federal and, if applicable, state income taxes in addition to a 10% federal tax penalty. So be sure to understand what counts as a qualified expense before deciding to spend the 529 savings plan funds on unapproved costs, such as student health fees or a plane ticket home at Thanksgiving.

States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states. Be sure to check with your tax advisor about state-specific tax benefits related to withdrawals.

You’ll have deadlines for paying tuition. Find out what your 529 savings plan provider will need from you to process a withdrawal and how much time you’ll need to allow for moving the money. Look into making things even easier by linking a bank account and enabling quick transfers. The initial setup could take a week or more, but subsequent transfers will be faster.

Next, decide the recipient: you as the account owner, your child or the school. This will impact tax reporting. A Form 1099-Q for payment from a Qualified Education Program will be sent out at tax time. The form is sent to you if funds are made payable to you as account owner, and the form is sent to your child if the funds are made payable to them or the school. Additionally, you will need to determine how you want the funds to be delivered: deposited to a bank account, sent via check through regular mail or paid online.

What to do with leftover funds

What if you don’t need all that money for school after all? If your child received a scholarship, you can still access the money up to the amount of the scholarship free of penalty. But you will have to pay taxes on the earnings. Or perhaps your child is attending a more affordable school, or room and board expenses are less than expected.

Before taking withdrawals for anything besides education, consider other options. Is your child planning on grad school? Your account can continue to grow and be used for those costs. If the child’s expenses are covered, the funds can be transferred to a 529 savings plan for a different beneficiary. You're even allowed to withdraw money for a younger beneficiary's K-12 tuition. However, the earnings may not be exempt from state taxes, so talk to a financial professional before making your decision.

In 2019, the SECURE Act included provisions that allow 529 funds to be used for payments toward the principal and interest of a qualified student loan (up to a $10,000 lifetime maximum per individual) for the beneficiary and each of the beneficiary's siblings.

The SECURE 2.0 Act of 2022 has now expanded on that flexibility. Beginning in 2024, unused funds held in a 529 account can be rolled over to a Roth IRA (individual retirement account) for the beneficiary if the account meets certain requirements. Penalty-free rollovers can be made if the account has been open for more than 15 years, and the amount to be rolled over must have been in the account for a minimum of five years. This rollover allowance has a $35,000 lifetime cap per beneficiary. 

Things to do next

  • Contact your 529 savings plan provider to understand the process of making a withdrawal.
  • Mark your calendar or set up an alert on your phone for the dates you'll need to start the transaction process. Make sure you leave plenty of time for the payment process.
  • Consult your tax professional about who should be the direct recipient of the money: you, your child or the school.

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