In February, we posted an article on how 529 College Savings Funds work and various aspects of making contributions. Now we’ll take a deeper dive into handling 529 withdrawals.

Refresher: 529 Plans are tax advantaged savings accounts for education expenses. Funds grow tax-deferred and the withdrawals – if “qualified” – are tax-free.   Some states even provide tax-benefits when you make contributions.

Summer is here and for those of you with children or grandchildren planning to attend a college, university, or trade school, it won’t be long before tuition invoices will arrive in the mail. If your child is just starting college this fall, it may be the first time you have thought about the mechanics of covering those costs.

529 plans are great accounts for saving toward the largest educational expense most of us will ever experience, but there are many rules, especially when it comes to 529 withdrawals.


What are Qualified Education Expenses from a 529 plan?

If you’ve been saving in a 529, the growth (earnings) in the account over the years has been free of income tax. If you use 529 dollars to pay for “qualified” expenses, you avoid paying tax (federal and state) on the earnings that have built up in the account. The key is to understand what are considered qualified, or eligible, expenses. Here are some examples:

Tuition and Related Fees

As expected, these are eligible expenses for which 529 funds can be withdrawn exempt from income taxes. Funds can be used to pay for tuition and fees at any accredited institution of higher education (colleges, universities, vocational/trade schools that are eligible to receive Title IV federal student aid).

Online college courses can also be covered as qualified expenses.

Room and Board

As long as the student is enrolled at least half-time, 529 funds can be used to cover these costs. If living off-campus, 529 funds will only cover an amount less than or equal to the college’s cost of attendance allowance for room and board for the semester/term.

Qualified Study Abroad Programs

Distributions from 529 plans can be used to study abroad, subject to certain restrictions. The distribution must be used to pay for qualified higher education expenses at an eligible educational institution. Transportation and travel expenses are not eligible expenses.

Books/Equipment/Supplies: If required for college courses or lab work, these are qualified expenses.

Computer/Internet Access

If used primarily while enrolled in an eligible institution, the IRS allows 529 funds to be used to purchase a computer (even mouse and speakers) as well as software and internet access. Not surprising, video games and software unrelated to your child’s studies won’t count as qualified expenses.

Student Loans

Up until 2019, 529 funds could not be used toward paying against student loans. With the passage of the SECURE Act, it is now possible to pay off student loan debt, but only up to a lifetime limit of $10,000.

Non-Qualified Expenses

Below are some items that won’t be considered qualified expenses for 529 Plan funds:

  • *Transportation/Travel: The costs of getting to and from campus – no matter the distance – will typically not count as eligible expenses for 529 withdrawals. This usually applies to travel related to study-abroad programs, too.
  • *Health Insurance: This is not an expense that is considered “qualified” by the IRS. Some colleges require students have health insurance or be covered under a parent’s plan.
  • Health Club dues/Sports Fees: Do not qualify

*Exceptions may apply if these costs are included as part of a comprehensive tuition fee (required for enrollment)


What about using 529 funds to pay for K-12 education expenses?
  • Legislation passed in 2017 created the option to use 529 plans to pay for up to $10,000 of tuition expenses per year at an elementary or secondary school. These can be private, public or parochial in nature.
  • Check with your tax advisor before taking a K-12 withdrawal as there can be tax penalties at the state level for doing so.
  • Keep receipts and eligible purchases separate from non-qualified purchases
  • Distributions should occur in the same tax year as costs are incurred to avoid taxes.
  • For students in off-campus housing (not provided by college/university), don’t forget to keep good records of food costs, rent and utilities.

How should you withdraw 529 funds?

Owners of 529 accounts (usually a parent) have 3 options for directing funds from the account:

  1. Funds can be sent to the 529 account owner
  2. Funds can be directed straight to the college/university
  3. Funds can be sent to the beneficiary (student)

Sending 529 payments directly to the institution can be convenient but be aware that it can take several days to process a 529 withdrawal, which includes selling investments within the account. It’s best not to miss tuition payment deadlines. For this reason, some 529 account owners may choose to pay tuition out of their own resources, then process a 529 withdrawal to themselves as reimbursement.

Does the timing of 529 withdrawals and when education expenses were incurred matter?

Yes, it is important that 529 withdrawals are processed during the calendar year1 in which expenses are billed. This can sometimes be an issue late in the year, for example, when a tuition invoice for the “spring” semester goes out in December.  

What are the taxes (costs) of taking non-qualified 529 withdrawals?

You’ll owe tax on the “earnings” portion of the withdrawal plus a 10% penalty (on the earnings portion). Some states may impose their own penalties. There are some exceptions to the 10 percent tax penalty, such as receiving a qualified scholarship or attending a U.S. Military Service Academy.

Ex: Susan funded a 529 Plan with $10,000 in 2007. She has not made any other contributions since. Today the account is worth $20,000. Her son decided to travel the world instead of attending college. Susan decides to take out the $20,000 and go on a big vacation. Susan will owe tax on the $10,000 of earnings plus a penalty of $1,000 (10% of $10k).

Do scholarships impact how much can be taken from a 529 to cover expenses?

Unlike a student loan, scholarships are awards that do not need to be repaid. However, they can impact whether 529 withdrawals are qualified or not.

Let’s say your daughter receives a full scholarship as an elite swimmer that will cover her tuition and textbooks. Room and board and equipment can be covered (tax-free) using funds in a 529 plan.

Non-qualified withdrawals up to the amount of the tax-free scholarship avoid the 10% penalty, but taxes will be due on the earnings withdrawn.

Are there other options if my student has a scholarship, doesn’t attend college or the 529 is overfunded?

Since there’s no time limit determining when 529 funds must be withdrawn, money saved can be used for graduate school or transferred to another member of the family. In this case family includes siblings, nieces/nephews, parents, aunts, uncles, spouse, or in-laws. Be advised, there can be “gift” tax implications when transferring a 529 to a beneficiary in a younger generation than the current beneficiary.

At PrairieView Partners, we recommend the use of 529 College Savings plans to most of our clients looking to support a student financially with the ever-rising costs of higher education, but it is important to understand the rules so that the key benefits can be realized.

Have questions? Please call us anytime to discuss

1It is required to report your 529 plan spending to the IRS, so keeping good records is important.
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Bo Aylin

Chief Compliance Officer

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Luke Murray, CFP®, CPWA®

Senior Wealth Manager
Certified Financial Planner®
Certified Private Wealth Advisor®

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