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How can I withdraw money from my 529 college savings plan without penalty?


You don’t have to be a parent to know that saving for a child’s education is important (and getting more and more expensive every year). According to the College Board’s “Trends in College Pricing 2021” report, tuition for in-state students attending a public four-year college rose 1.6% — and for students attending a private four-year , they increased by 2.1% during the 2021-2022 Academic Year.

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A 529 college savings plan is one of the best ways to save money due to its impressive list of available uses and tax deductions. 529 plans are state-run, tax-advantaged accounts that allow you to save for a child’s college education.

All states offer 529 plans (except Wyoming), and there are two types: Savings plans (savings are normally invested in mutual funds or exchange-traded funds [EFTs]; more common and more varied) and prepaid tuition plans (purchase of tuition credits at current prices for use in the future; less common and more restrictive).

You can use 529 plans to pay for college and apprenticeship programs (plus K-12 tuition and private schools thanks to the Tax Cuts and Jobs Act of 2017). The SECURE Act of 2019 allowed a 529 to be used to pay up to $10,000 of a beneficiary’s student loans and up to $10,000 for the loans of the beneficiaries’ siblings as well. If you use a 529 plan to save for college, it will have minimal impact on financial aid eligibility, according to Saving for College.

Because each state has different plans, and you don’t necessarily have to be a resident to get your 529, do your research and pay attention to tax breaks, fees, investment strategies, and type of plan. each state offers.

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According to a recent survey conducted by Edward Jones and Morning Consult, only 40% of respondents recognize a 529 plan as an education savings tool, with 51% of respondents saying they did not know or were unable to respond to the question.

Any parent or benefactor should be able to invest in a 529 without too much difficulty. However, according to Consumer Reports, not only is withdrawing from a 529 account more complicated than you might think, but most Americans are unaware of how these plans work and their potential tax benefits.

To make sure you’re withdrawing funds from your 529 plan correctly, here are some tips to keep in mind:

  • Writing in Consumer Reports, Penelope Wang said it’s important to know what’s funding your 529 investment and to transfer funds to safer vehicles closer to when you’ll use them. If your 529 is full of stock and bond investments, it might be a good idea to take advantage of a semi-annual investment shift and shift them into money market funds. “You don’t want a stock market drop causing losses to your account, just when you need that money to pay tuition,” said Gordon Achtermann, a certified financial planner in Fairfax, Va. .
  • Although a 529 plan offers a wide variety of qualified education-related expenses — including tuition, fees, books, books, and supplies — knowing exactly what your plan covers and won’t save a lot of headaches and money. For example, off-campus accommodation is sometimes an expense you can pay with 529 funds (but sometimes not). Transport and insurance are not covered. The rules for elementary and secondary school expenses and for student loan debt differ by state, so check with your plan administrator to be sure.
  • If you qualify for another education tax credit, such as the American Opportunity Tax Credit (AOTC) or a Lifetime Learning Credit, be sure not to “double up”. By using your 529 plan for college expenses, you may be disqualified from another education tax credit program. Financial aid expert Mark Kantrowitz suggested “paying off the credit limit on tuition and textbooks before using a 529 plan distribution to pay for remaining costs,” according to Consumer Report.
  • Be sure to time your payments and keep all receipts related to 529 plan expenses. You must spend the money you withdraw from a 529 plan within the same calendar year, so your withdrawals must match your expenses.
  • Try to spend all of your 529 plan funds or save the remaining funds for a beneficiary’s further education (higher education) or transfer the beneficiary to another child or family member. The alternative is to cash out any remainder of 529. If you choose to do so, you will owe interest on the winnings and will have to pay a 10% penalty.

See: 29 States Now Offer Some Form Of Tuition-Free Education, So Why Aren’t People Going To College?
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Forbes offers a comprehensive summary of 529 plans by state, which you can view here.

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About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to make a career change in 2016 and focus full-time on all aspects of writing. He recently completed a technical degree in communications and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience writing for the retail industry.