Using a 529 plan to cover college costs can be a great way to minimize the need for student loans. But when tapping into the funds from this type of savings vehicle, it’s important to understand the spending rules to avoid a costly 529 withdrawal penalty. You can avoid penalties by understanding what expenses are eligible for 529 spending. 

529 plan withdrawal rules

Because a 529 plan offers tax breaks for education savings, the IRS has strict rules on how you can use the funds without incurring a penalty.

More specifically, if you want to avoid taxes and a penalty for withdrawing from a 529 plan for your college-aged student, you can use the money to cover only the following:

Tuition and fees

Tuition and fees are required expenses, and 529 funds can be spent on these costs without penalty.

Textbooks and supplies

Textbooks are another allowed expense for 529 spending. The purchases must be limited to those books listed as required reading for each class to avoid a 529 penalty.


Supplies directly related to school needs can also be covered with 529 funds. This could include the costs of lab supplies and everyday needs like notebooks, pens, pencils and materials that are mandatory for school.

Room and board

Funds can be used for room and board if you attend at least half-time and pursue a degree or certificate program.

Rules limit how much of your 529 funds can be spent on this expense. For students living in on-campus housing, 529 spending cannot exceed the amount that the school charges for room and board. If the student lives off campus, the use of 529 funds cannot exceed the school’s estimates for such costs.

Computer and internet access

Computer equipment, printer and internet purchases specifically for the 529 beneficiary are allowed as long as the spending occurs when the beneficiary attends an eligible institution. The funds cannot be used to cover the cost of computer games or hobby-related purchases for entertainment or amusement.

Equipment for students with special needs

Special needs equipment for enrolling or participating in college can be paid for with 529 withdrawals.

As long as the money is used for qualified education expenses for the college-aged student, there is no withdrawal limit for 529 plans.

Account holders can also use 529 plan funds to pay up to $10,000 per year in K-12 tuition expenses. You can typically make withdrawals from the account through your plan’s provider online, by phone or by mail.

In addition, the 2019 SECURE Act made it possible to use up to $10,000 from a 529 plan to pay off the beneficiary’s student loans and an additional $10,000 for the student loans of each of the beneficiary’s siblings.

What is the 529 plan withdrawal penalty?

If you don’t use your college savings plan for eligible expenses, your 529 plan nonqualified withdrawals may incur a 10 percent penalty and be subject to federal income taxes on the investment gains at whatever rate the IRS would normally charge. However, there’s no 529 early withdrawal penalty like with retirement accounts.

There are also state penalties for nonqualified withdrawals from 529 plans. Many states impose taxes on nonqualified withdrawals.

In Washington state, for example, the 529 withdrawal penalty for non-qualified distributions includes earnings on 529 funds being taxable at the federal and state level, plus the 10% federal penalty.

In Illinois, the penalty is even steeper. Any 529 earnings used for a non-qualified 529 withdrawal trigger federal and state income taxes plus the 10% federal penalty. Additionally, Illinois may attempt to take back previous tax deduction benefits.

No matter where you live, the penalty and any taxes imposed will apply only to your gains in the account. This is because the money you contributed was already taxed, so you’re getting tax-free growth only on what your investment earns.

Exceptions to the 529 withdrawal penalty

You can’t escape income taxes on 529 plan nonqualified withdrawals. You can only get the common exceptions to the 10 percent penalty:

  • The beneficiary of the plan has died or become disabled
  • The beneficiary received a tax-free scholarship
  • The beneficiary received educational assistance through a qualifying employer program
  • The beneficiary is attending a U.S. military academy
  • The funds are used to claim another educational tax benefit, such as the American opportunity tax credit, lifetime learning credit or tuition and fees deduction. Ensure you know how to use these other educational benefits alongside your 529 plan.

With scholarships, educational assistance and military academy attendance, you can withdraw up to the amount of the scholarship benefit you or your child received from the 529 plan and avoid the 10 percent penalty.

You will, however, still have to pay taxes on the earnings portion of the withdrawal. Ask for a receipt or documentation of the scholarship you can use as proof at tax time.

Note that some states may have different rules than the federal government. For example, your state may consider withdrawals for K-12 tuition expenses to be a nonqualified distribution. Your state may also reverse past deductions or credits you received for contributions if you don’t use your 529 plans for qualified expenses or transfer the money to another state’s plan.

Consider consulting a tax professional before taking money from your 529 plan.

Other ways to use a 529 plan

If your child decides not to attend college or gets enough assistance through scholarships or an employer that they don’t need the money you’ve saved, don’t fret. There are other ways to still enjoy the benefits of tax-free withdrawals.

Help a family member pay for school

As the owner of the 529 plan, you can change the beneficiary to someone else in your family without incurring any fees. So if one child doesn’t need the funds, you can switch your beneficiary to another family member of the original beneficiary. As you’re contemplating how to allocate remaining funds, remember you can only change the beneficiary on a 529 plan twice a calendar year. Additionally, the new beneficiary must be related to the original beneficiary.

Pay down student loan debt

The SECURE Act allows 529 plan owners to use up to $10,000 to pay off student loan debt without tax consequences or penalties. That means the money can repay federal and private student loans. It cannot be used to pay off any other type of loan you may have used to help cover college expenses, such as a home equity loan, retirement account loan or a personal loan.

The $10,000 usage limit is based on the beneficiary, not the account. You can use this approach with more than one beneficiary. Equally important to note, the $10,000 limit is a lifetime limit per beneficiary, not an annual limit.

Pay for K-12 education

In most states, 529 plan owners can use funds to pay up to $10,000 per year in K-12 tuition expenses without penalty or tax burden. This can be especially helpful if you have children in private schools. However, withdrawals over $10,000 for K-12 schooling or any withdrawals used to pay for non-qualifying expenses will incur income taxes and a 10% penalty.

Pay for training program expenses that qualify

Withdrawals don’t incur taxes or fees as long as your child attends an eligible postsecondary institution, including trade and vocational schools such as cosmetology and culinary schools. The funds from a 529 account can cover the cost of trade schools eligible for Title IV federal student aid.

If your child wants to pursue another training program, check the IRS’ list of eligible educational institutions to see if you’re clear.

Pay for your own education

In addition to changing the beneficiary from child to child, you can change it to yourself. If you plan to pursue a postsecondary degree such as a master’s or law degree, you can use leftover 529 plan funds to cover your expenses without a 529 withdrawal penalty.

The bottom line

Understanding 529 plan withdrawal rules is important in avoiding costly fees and penalties. You will incur a penalty for withdrawing money from a 529 college savings plan to use on nonqualified expenses, but there are some exceptions to this rule.

Before tapping into the funds in your 529 account, research the penalty exemptions to determine whether your needs align with the exceptions. If the beneficiary received a tax-free scholarship or is attending a military academy, for instance, you may be able to avoid paying the penalty for using 529 money.