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.

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

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

Step 1 – Know what's covered.

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), although not all states allow it. 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.

Step 2 – Plan ahead.

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.

Step 3 – Decide the details.

Next, decide the recipient: your child or the school. This will impact tax reporting. Whoever receives the funds will receive a Form 1099-Q for payment from a Qualified Education Program at tax time to report use toward qualified or nonqualified expenses. Then determine how you want the funds to be delivered: Deposit to bank? Regular mail or 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 free of penalty. 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 education. Not all states offer this, however, and it may not be exempt from state taxes, so talk to an advisor before making your decision. Recent legislation has added certain student loan expenses (up to a $10,000 lifetime maximum) as a qualified education expense.

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.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by American Funds Distributors, Inc. and sold through unaffiliated intermediaries.

Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. CollegeAmerica is sponsored by Virginia529℠. 

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This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.