529 Plan Withdrawal Rules: How to Take Tax-Free Distributions & Avoid Penalties

You can withdraw 529 plan savings tax-free to pay for qualified education expenses, which include costs required for enrollment and attendance at in-state, out-of-state, public, and private colleges, universities, or other eligible post-secondary educational institutions. However, you may be subject to federal taxes and a penalty if you don’t follow 529 withdrawal rules. 

In this guide on 529 withdrawal rules, you’ll learn:

• How to calculate qualified education expenses to ensure tax-free distributions
• When to time your withdrawals correctly
• How to coordinate withdrawals from multiple accounts
• Ways to avoid penalties on non-qualified withdrawals
• Tips for handling leftover funds after graduation

Step 1: Calculate the beneficiary’s qualified education expenses

To calculate qualified 529 expenses, add up all education costs (tuition, fees, books, supplies, room and board for half-time students), then subtract any scholarships, employer assistance, and expenses used for education tax credits.

529 plan account owners can withdraw any amount from their 529 plan, but only qualified distributions will be tax-free. The earnings portion of any non-qualified distributions must be reported on the account owner’s or the beneficiary’s federal income tax return.

Plus, those withdrawals are subject to income tax and a 10% penalty. Of course, you might consider exploring exceptions to the penalty to avoid the extra costs. 

To calculate a 529 plan beneficiary’s qualified education expenses, first, add up:

• College expenses, including tuition, fees, books, supplies and equipment, computers, and room and board if the student is enrolled on at least a half-time basis
• K–12 tuition and fees (up to $10,000 per year; increases to $20,000 starting in tax year 2026) and, beginning with distributions after July 4, 2025, additional eligible expenses such as curriculum materials, tutoring (meeting program requirements), online learning subscriptions, educational therapies for students with disabilities, standardized test fees, and dual-enrollment tuition.
• Credentialing, licensing, and continuing education programs (distributions after July 4, 2025), including preparation and exam fees for professional licenses (CPA, bar exam, etc.), skilled trades certifications (CDL, plumbing, welding, HVAC, cosmetology), and required continuing education credits. These programs must generally be listed in your state’s Workforce Innovation and Opportunity Act (WIOA) directory or the federal WEAMS database.

Next, subtract any tax-free educational assistance, including:

• Tax-free scholarships
• Educational assistance through a qualifying employer program
• Veteran’s educational assistance

Next, subtract the amount of any expenses used to justify the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC).

For example, consider a beneficiary who:

• claims the maximum $2,500 AOTC,
• has $10,000 in qualified expenses, and
• won a $2,000 tax-free scholarship.

This person may withdraw $4,000 tax-free from a 529 plan:

$10,000 (qualified expenses)
– $4,000 (used to generate AOTC)
– $2,000 (scholarship)
= $4,000 tax-free 529 plan distribution

Be careful not to withdraw more from your 529 than your qualified education expenses. In this example, if the 529 plan account owner withdraws more than $4,000, the excess distribution will be considered non-qualified.

Excess withdrawals trigger taxes and a 10% penalty on the earnings portion. If you accidentally withdraw too much, consider rolling the excess into another 529 plan within 60 days or prepaying next year’s expenses.

However, the 10% penalty may be waived on a non-qualified distribution up to $2,000 (the amount of the beneficiary’s scholarship). Other exceptions to the 10% penalty include:

• Receiving a tax-free scholarship (penalty waived up to the scholarship amount)
• Using educational tax credits
• Attendance at a U.S. Military Service Academy
• Death or disability
• Returning excess distributions promptly

Qualified vs. non-qualified 529 expenses

Step 2: Determine when to withdraw

You must take 529 plan distributions during the same calendar year you paid for the qualified expenses—not the academic year. This timing rule is critical to maintaining tax-free status.

You should take 529 plan distributions during the same year you paid for the qualified expenses. For example, do not include second-semester tuition expenses that you paid for in December of the previous year.

You can withdraw funds in January for qualified expenses paid later in the same year, such as in August, or withdraw funds in December for expenses you’ve already paid earlier in the same calendar year. Just be sure withdrawals and expenses match within the calendar year. Make sure they match up within the same calendar year, not the academic year.

If you withdraw the 529 money in December for a tuition bill you don’t pay until January, you risk not having enough qualified higher education expenses (QHEE) during the year of the 529 withdrawal. Likewise, if you take a distribution in January to pay for expenses from the previous December, that distribution will be non-qualified. 

Towards year-end, 529 account owners should determine how much was spent on qualified expenses during the year and make the appropriate “catch-up” distribution from the 529 plan. As part of this process, determine if the AOTC is maximized by paying second-semester college bills in December versus January.

Step 3: Decide which 529 plan account to withdraw from

If you have multiple 529 accounts for the same beneficiary, withdraw from the account with the highest earnings ratio first to maximize tax-free growth and minimize potential future tax liability on non-qualified distributions.

If multiple family members have 529 accounts for your child, coordinate withdrawals carefully to avoid confusion and unintended tax consequences. Recent FAFSA changes mean grandparent-owned 529 withdrawals no longer affect financial aid eligibility (though CSS Profile impacts remain). Consider consolidating ownership to simplify distributions, but confirm first if your 529 plan permits ownership transfers.

Different accounts will experience different growth rates. Tapping into the account with the higher earnings ratio once your child gets to college locks in maximum tax savings. If your child graduates when you still have money in 529 plans, you’ll minimize the non-qualified distribution tax costs because the lowest-growth account is left for last.

Step 4: Complete a withdrawal request

You can request 529 withdrawals online through your plan’s website, by phone, or by mailing a withdrawal request form that includes your account details and distribution amount.

Parents can make 529 withdrawals by completing a withdrawal request form online. Some plans also allow 529 plan account owners to download a withdrawal request form to be mailed in or make a withdrawal request by telephone. 

The withdrawal request form will typically ask for information such as:

• 529 plan account number
• Your name, and Social Security number or Taxpayer Identification Number
• The beneficiary’s name and social security number or Taxpayer Identification Number
• Phone number

If the 529 plan account owner is taking a partial withdrawal, they can select a portfolio or portfolios to withdraw from. The total dollar amount entered from each portfolio should equal the total distribution amount.

If possible, avoid making the distribution payable to the account owner. When 529 plan distributions are payable to the beneficiary, the beneficiary’s college, or K-12 school, a Form 1099-Q will be issued to the beneficiary. Non-qualified distributions payable to a parent may result in a higher tax liability.

You can also roll 529 plan funds into another account with the same beneficiary or a sibling’s 529 plan account. Both options comply with 529 rules for withdrawal.

What other 529 withdrawal rules should you know?

When you’re making a withdrawal, consider these factors as well:

• Always match withdrawals to the same tax year as qualified expenses to avoid taxes and penalties and understand what expenses qualify.
• Keep detailed receipts organized for IRS documentation.
• Maximize tax savings by first claiming federal credits like the American Opportunity Tax Credit.
• If unsure about how much you’ll spend, consider year-end “catch-up” distributions.
• Confirm your school’s policy if having 529 distributions sent directly to the college.
• Know qualified room and board expense limits for off-campus living.
• Consider ABLE account transfers for beneficiaries with qualifying disabilities.

If you are taking advantage of the new Big Beautiful Bill provisions (effective July 4, 2025), be sure to confirm your expense qualifies under the expanded rules, especially for credentialing/licensing programs and new K–12 categories. Keep documentation such as WIOA or WEAMS listings when required.

How do you prove 529 expenses for tax purposes?

To avoid tax penalties and defend your withdrawals if audited, keep detailed documentation of all qualified education expenses. Save receipts, tuition bills, fee statements, and proof of enrollment for at least three years after filing your tax return.

You’ll receive IRS Form 1099-Q from your 529 plan showing total distributions for the year. This must align with your qualified education expenses. If you claim education tax credits like the American Opportunity Tax Credit, make sure you don’t double-count expenses—the IRS requires you to reduce your qualified 529 expenses by any amounts used to generate the credit.

For K-12 expenses, keep documentation showing the expenses were required for enrollment, such as tuition invoices from the school. For credentialing and licensing programs (starting July 4, 2025), verify the program appears in your state’s WIOA directory or the federal WEAMS database and keep proof of this listing.

What happens to leftover funds after graduation?

You might have leftover funds in a 529 plan account after your beneficiary graduates from college or decides not to go to college. Under 529 plan withdrawal rules, the 529 account owner may:

• Use the money to make student loan payments
• Roll over to a Roth IRA (starting in 2024)
• Liquidate the account and pay income tax and a 10% penalty on the earnings
• Keep the funds in the account to use for graduate school or continuing education
• Change the beneficiary to a qualifying family member who will use the funds for college
• Save the funds for a future grandchild

Key takeaways

• Match all 529 withdrawals to qualified expenses in the same calendar year to maintain tax-free status.
• Coordinate withdrawals with scholarships and education tax credits to maximize benefits.
• Withdraw from accounts with higher earnings first to lock in tax savings.
• Keep detailed receipts and documentation for all qualified expenses for at least three years.
• Starting in 2026, K-12 withdrawal limits increase from $10,000 to $20,000 per year.
• New Big Beautiful Bill provisions expand qualified expenses for credentialing programs and K-12 expenses (effective July 4, 2025).

The bottom line

Your 529 plan is an excellent tool to save for your children’s college education. However, you must follow its scrupulous rules to maintain your savings and tax benefits when you withdraw funds for school. That means knowing qualified and non-qualified expenses, options for leftover funds, and penalties. 

Frequently Asked Questions (FAQs)

How do scholarships impact 529 plan withdrawals?

If your child receives a scholarship, you can withdraw up to the scholarship amount from your 529 without the 10% penalty—but you’ll pay taxes on the earnings portion if the withdrawal is not used for qualified education expenses. To avoid tax and penalties, only withdraw amounts matching your remaining qualified expenses.

How much can I withdraw from my 529 plan each year?

If your child is in college, there is no limit for 529 withdrawals. The only requirement is for the withdrawals to be used for qualified 529 plan expenses. If you’re paying for private school expenses for younger children, you can withdraw up to $10,000 tax-free for qualified education expenses for children between K-12 in 2025 (increasing to $20,000 in 2026).

Can you withdraw from your 529 plan at any time? 

Yes, you can withdraw from your 529 plan at any time. However, ensure you use your withdrawals for that year’s qualified expenses. You also have to make sure that you withdraw your funds at the right time to align with when you’re going to be using the funds. 

What happens if I use 529 plan withdrawals for non-qualified expenses?

If you use 529 plan withdrawals for non-qualified expenses, you’ll have to pay income tax and a 10% penalty. 

What expenses are not eligible for tax-free withdrawals from the 529 plan?

Non-qualified expenses generally include college application fees, transportation, health insurance, and other costs not directly tied to enrollment or attendance.

However, recent changes under the Big Beautiful Bill expanded qualified expenses for K–12 students. For example, college entrance exam fees (e.g., SAT, ACT) and certain standardized testing costs now qualify as K–12 education expenses and can be paid for with 529 plan funds. Be sure to confirm whether your expense is on the current list of qualified 529 plan uses before making a withdrawal.

Can I withdraw from a 529 plan for room and board?

Yes, room and board are qualified expenses if the student is enrolled at least half-time. For on-campus students, you can withdraw up to the actual cost charged by the school. For off-campus students, withdrawals are limited to the school’s cost of attendance allowance for room and board.

What happens if I withdraw too much from my 529 plan?

If you withdraw more than your qualified education expenses, the excess is a non-qualified distribution subject to income tax and a 10% penalty on earnings. You can fix this by rolling the excess back into a 529 plan within 60 days or prepaying known expenses for the next year.

Related articles

• What you can pay for with a 529 plan
• How to open a 529 plan
• 529 plan contribution limits
• Rolling over 529 funds to a Roth IRA
• Compare 529 plans by state