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How Can I Withdraw Money From My 529 College Savings Plan Without Penalty?


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You don’t need to be a parent to know that saving for a child’s education is important (and getting more expensive every year). According to the College Board’s “Trends in College Pricing 2021” report, tuition for in-state students attending a four-year public college increased by 1.6% — and for students attending a four-year private institution, it 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 squirrel away 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 for Wyoming), and there are two types: Savings plans (savings are normally invested in mutual funds or exchange-traded funds [EFTs]; more common and more variety) and prepaid tuition plans (purchasing tuition credits at today’s prices to use in the future; less common and more restrictive).

You can use 529 plans to pay for college and apprenticeship programs (as well as for K-12 tuition and private schools thanks to the 2017 Tax Cuts and Jobs Act). The SECURE Act of 2019 made it possible to use a 529 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 a 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 its 529, do your research and pay attention to the tax breaks, fees, investment strategies and type of plan each state provides.

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According to a recent poll conducted by Edward Jones and Morning Consult, only 40% of respondents recognize a 529 plan as an education savings tool, with 51% of those asked claiming they didn’t know or were unable to answer the question.

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

To ensure you are withdrawing funds from your 529 plan properly, here are some tips to keep in mind:

  • Writing in Consumer Reports, Penelope Wang said that it is important to know what is funding your 529 investment and to switch funds to safer vehicles closer to when you will be using them. If your 529 is chock full of stock and bond investments, it might be a good idea to take advantage of a biannual investment switch and move them into money market funds. “You don’t want a stock market decline to cause losses in 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 doesn’t will save you a lot of headaches and money. For example, accommodation off-campus is sometimes an expense you can pay for with 529 funds (but sometimes not). Transportation and insurance are not covered. 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 are eligible to benefit from another educational tax credit, like the American Opportunity Tax Credit (AOTC) or a Lifetime Learning Credit, make sure you don’t “double dip.” Using your 529 plan for college expenses, you may be disqualified from other educational tax credit programs. Financial aid expert Mark Kantrowitz suggested “paying up the credit limit on tuition and textbook expenses before using a 529 plan distribution to pay the remaining costs,” per Consumer Report.
  • Make sure to time your payments and save all receipts related to 529 plan expenses. You have to spend the money you withdraw from a 529 plan in the same calendar year, so your withdrawals have to match your expenses.
  • Try to spend your entire 529 plan funds or save leftover funds for a beneficiary’s further schooling (graduate school) or transfer the beneficiary to another child or family member. The alternative is cashing out any 529 remainder. If you decide to do that, you will owe interest on the earnings and will have to pay a 10% penalty.

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Forbes offers a comprehensive summary of 529 plans by state, which you can check out 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 change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma 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 in copywriting for the retail industry.

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