A Guide to 529 Plan Withdrawals

529 Plan Jun 1, 2020

With tax benefits and investment gains, a 529 College Savings Plan is often the best way to save for college. But before you start saving with CollegeBacker, you want to know the rules. We explain it all here.

Here’s what you need to know:

  1. You can always withdraw your original contribution (the “principal”) without additional taxes or penalties.
  2. You can spend your 529 plan on tuition & fees, room & board, books, and more – at colleges across the country, and even many higher education institutions abroad.
  3. If you spend on a non-qualified expense, the “earnings” portion is subject to a 10% penalty plus income taxes – but there are a few ways to avoid or minimize this.

Table of Contents

  1. Let’s Start With One Thing…
  2. Qualified or Non-Qualified Expense?
  3. Before Making a Non-Qualified Withdrawal
  4. Understanding 529 Penalties
  5. How To Make a Withdrawal

1. Let’s Start With One Thing…

At CollegeBacker, we often hear concerns about money saved in a 529 being “locked up,” so we want to start with one important clarification:

You can always withdraw your original contribution (the “principal”) for any purpose, without penalty.

Note that if you originally claimed a state income tax deduction for the contribution, you may need to pay a state “recapture” tax. However, you will not owe any additional federal taxes on this withdrawal.

Of course, if you withdraw that money, it will no longer grow for you, which defeats the purpose of using a 529 in the first place. But rest assured that if you need the money for an unexpected emergency, you can always access it.

2. Qualified vs. Non-Qualified Expenses

You will not pay any taxes on 529 plan withdrawals spent on a qualified expense at an eligible institution. In this section, we explain qualified expenses and eligible institutions, and then we share a few exceptions to these rules.

What are qualified expenses?

Qualified Expense Description
Tuition and Fees 529 plans cover tuition and fees for both full and part time students.
Room and board payment This counts for both on and off campus housing. Off campus housing is covered as long as rent does not go over the cost it would be to live on campus.
Textbooks and supplies Only textbooks that are required by the school are qualified expenses. This budget is set by the school. Other supplies like pens, paper, and scantrons are covered.
Computer/ tech related equipment A new laptop, internet services, and printers are qualified expenses.
Special needs equipment Special equipment such as wheelchairs and prosthetics qualify. Although transportation does not usually qualify, transportation for those with special needs do.

What are non-qualified expenses?

Non-Qualified Expense Description
Transportation All transportation costs to and from college do not apply. This includes gas, airfare, bus fares.
Student loan repayments Student loan repayments cannot be paid with 529 savings.
Sports and activity fees Fees for extracurriculars like sport clubs and school organizations are not covered by 529 plans.
Insurance and medical expenses General and school required health insurance is not a qualified expense. Medical expenses like being transported to the hospital are not qualified expenses.

What is an eligible institution?

You can spend your 529 at any higher education institution that accepts federal financial student aid. This includes (click here for the full list):

  • In-state and out-of-state college, public or private: Yes, 529 funds may be used in any state.
  • Graduate schools: If your child’s educational journey continues, so does the usefulness of your 529 (or you can save for yourself too).
  • International schools: 529s can be used at over 800 foreign universities. Click here to see if a specific school is eligible.
  • Trade schools: You should check for a specific school’s eligibility, but some trade schools that accept 529 plans include culinary school, beauty school, massage therapy school, automotive and diesel school.

Keep in mind that each type of institution will have different costs, and you should plan your savings accordingly. CollegeBacker makes it easy to plan how much to save, regardless of which type of institution your family is planning for.

Are there any exceptions?

For a few situations, you can still make a non-qualified withdrawal without paying the 10% penalty:

  1. Beneficiary gets a scholarship
  2. Beneficiary goes to a U.S. service academy
  3. Beneficiary passes away

However, remember that you will have to pay taxes on the gains, so consider spending the money on a qualified expense or changing the beneficiary to another immediate family member to avoid any additional taxes.

Case Example:

Amy invests in a 529 plan for her son Ben. Ben receives a $2,000 scholarship, and Amy decides to withdraw $2,000 from the 529 to buy a new car. She does not pay a 10% penalty, because of Ben’s scholarship, but the $2,000 is subject to taxes.

Ben ends up attending a U.S. Naval Academy. Now, Amy can withdraw up to the cost of attendance amount from the 529 plan without a 10% penalty.

If Ben were to unfortunately pass away before attending college, Amy would be able to withdraw the full balance of the 529. The earnings portion is taxed, but she does not have to pay the 10% penalty.

Finally, Amy decides that even though Ben qualifies for certain exceptions, she does not want to pay any taxes on the gains. She transfers the funds to her second child, Christie, and the account continues to grow.

3) Before Making a Non-Qualified Withdrawal

Before making the nonqualified withdrawal, ask yourself a few questions:

  • Are you anticipating any other qualified expenses? Remember, you can spend the funds on other expenses like books or room & board.
  • Is your child planning on additional schooling (e.g., graduate school)? There is a long list of eligible institutions, so consider saving any leftover funds for additional schooling in the future.
  • Is there another beneficiary you can change it to? You can change the beneficiary to anyone in the immediate family. Click here for a full list.
  • Can you withdraw only the principal, instead of the gain? Especially if you have multiple 529s, see if you can cover the amount you need by only withdrawing the principal (e.g., withdrawing a small amount from multiple accounts, instead of everything from one account). By withdrawing only the principal, you will avoid both the penalty and taxes.
  • Do you qualify for any exceptions? For example, if your child earned a scholarship or enrolled in a US service academy, remember that you can withdraw that amount without any penalty (but you will have to pay taxes).

4) Understanding 529 Penalties

Let’s say the unexpected happens and you need to make a non-qualified withdrawal. Perhaps your child decides not to attend college, or you have been so successful in saving for college that you have extra money left in the account after your child completes college. Or maybe an emergency happened and you just need the cash.

So, what happens if you do need to make a nonqualified withdrawal?

  • You will have to pay 10% penalty on the gains
  • You will have to pay income taxes on the gains
  • If you previously claimed a state income tax deduction for the contribution, you may need to pay this back as a state recapture tax

Lastly, there is one strategy that can help minimize the additional costs if you need to make a nonqualified withdrawal. If the beneficiary is in a lower income tax bracket, you can transfer the 529 account to the beneficiary pay taxes at the beneficiary’s lower income tax.

5) How to Make a Withdrawal

After years of saving, it’s finally time to spend the money on college! How does that work, exactly?

First, decide how much to withdraw. If you are using student loans, scholarships, or financial aid to supplement your college savings, it pays to do a little planning to determine the right amount to withdraw for any particular year.

Second, decide who will receive the money. There are three options: 1) the school, 2) yourself (the account owner), or 3) the beneficiary. Sending the check directly to the institution will simplify the process. Trust is paramount if you send the check to the beneficiary, since the student will have sole control over the funds.

Third, report the spending to the IRS on a form 1099-Q. This ensures that the money is being used for a qualified higher education expense. In other words, save your receipts!

Finally, celebrate! You’ve successfully saved money for college using a 529 College Savings Plan, setting your child up for long-term success. Great work!

If you have any other questions, don’t hesitate to send us an email at support@collegebacker.com.



Backer is a social savings platform that helps people create tax-free 529 accounts for their children, provides investment guidance, and allows family and friends to contribute with ease.

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