How to Withdraw Your 529 College Savings Plan Money

For many people, saving to help send kids to college has become an important part of their personal financial management. The 529 plan has become a favorite vehicle for education savings because it provides individuals a way to grow their investment and draw on it tax-free. Today, more money is being put away in 529 plans than ever before. Now the question becomes: How do you withdraw money from your 529 college savings plan?

It's important to know that distributions taken from 529 plans are nontaxable as long as they are used on qualified education expenses. Any excess distributions not attributed to qualified education expenses are subject to income tax, plus an additional 10% tax penalty. This makes it crucial to understand what is and is not considered a qualified expense.

How to Calculate 529 Expenses

Because excess distributions are both taxable and subject to additional penalty, it's imperative to properly calculate expenses. Start by adding up all your qualified education expenses. Broadly speaking, an expense is qualified if it is attributed to the cost of enrollment and attendance at colleges or universities, both in-state and out-of-state, public and private institutions. This includes tuition and fees, books, school supplies and equipment, internet access, and room and board. Off-campus rent is also included, up to the "cost of attendance" figure posted by the individual institution. Since 2018, up to $10,000 per student in K-12 tuition expenses also qualify. If you're unsure whether an expense qualifies, check with your individual plan provider.

Next, you'll need to subtract any tax-free educational assistance you receive. This can include tax-free scholarships, veteran's educational expenses, or qualified employer educational assistance programs. You'll also need to subtract any expenses used to justify the American Opportunity Tax Credit (AOTC) or Lifetime Learning Tax Credit. For example, if you have $10,000 of education expenses, spending $4,000 will qualify you for the AOTC, leaving $6,000 of expenses that are eligible through a 529 plan.

Taking Distributions

Distributions from 529 plans must be taken during the same calendar year the expenses were paid. This means you cannot take a distribution for second-semester expenses that were paid in December of the previous year. This is less of a risk for people who take distributions to pay for expenses as they arise than it is for those who use distributions to periodically reimburse themselves. Distributions can be made from a 529 plan to the school directly, the account owner, or to a college-aged child. Distribution requests can be made via online request forms, and many plans also allow requests via mail or telephone.

Excess Distributions

Excess distributions are always taxable as income, but there are some instances where the additional 10% tax penalty is waived, such as: if your expenses were reduced due to coordinating restrictions involving the receipt of the AOTC or Lifetime Learning Tax Credit, if expenses were reduced due to receipt of tax-free scholarships or other tax-free payment of educational expenses, if you attended a military academy, if the distribution is attributable to the disability of a beneficiary, or if the distribution becomes unqualified due to a refund from the educational institution and is deposited back into the same 529 plan within 60 days.

Optimizing Distributions

If you have multiple 529 plans, remember that grandparent-owned plan distributions count as student income, which can have an adverse effect on the potential amount of Free Application for Federal Student Aid (FAFSA) funding. It can also be wise to spread out 529 withdrawals evenly across each year of schooling to minimize the amount of loans needed from non-federal sources. If the account has leftover funds after college, they can be used toward student loan payments. Additionally, they can be saved for a future child's college expenses, or transferred to a new beneficiary in the family. If you choose to take leftover funds as a distribution, they will be subject to both income tax and a 10% penalty. The most important part of managing your 529 plan is to document expenses. Even if your individual plan provider doesn't require proof of expenses, the IRS still may.


The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.

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