529 Plan: Withdrawal Rules, Qualified Expenses, and Tax Planning

February 20, 2026

After years of steadily contributing to a 529 college savings plan, the focus eventually shifts from saving to spending. As college approaches, you’ll be responsible for deciding when to withdraw funds and how they’re used. While 529 plans offer powerful tax advantages, getting the most out of them requires understanding a few important rules before withdrawals begin.

A quick refresher on contribution limits

In 2025, annual contributions of up to $19,000 per individual, or $38,000 per married couple, can be made to a 529 plan for each beneficiary without triggering gift tax reporting. Grandparents are subject to the same limits. Larger contributions are allowed, but amounts above the annual exclusion must be reported to the IRS.

There’s also a special five-year election, often called “front-loading,” that allows contributors to deposit up to $95,000 per person (or $190,000 per couple) in a single year, provided they spread the gift across five years for gift-tax purposes. This strategy can accelerate college savings but uses up future annual exclusions.

Why withdrawal rules matter

When 529 funds are used properly, withdrawals are free from federal income tax—and in many states, state income tax as well. But mistakes can be costly. Nonqualified withdrawals may trigger taxes and penalties, and poor timing or coordination can also affect eligibility for financial aid. Understanding the rules in advance helps protect both your tax benefits and your child’s education funding.

Below is a practical framework for using 529 funds efficiently and confidently.

1. Align withdrawals with qualified education expenses

To remain tax-free, total withdrawals in a given year must not exceed your student’s adjusted qualified higher education expenses. These generally include tuition, mandatory fees, books, supplies, required equipment, computers, certain special services, room and board, and limited student loan repayment.

From that total, you must subtract any costs already covered by tax-free assistance such as scholarships, grants, employer education benefits, or veterans’ benefits. You must also exclude expenses used to claim education tax credits—double-dipping is not allowed.

2. Understand what qualifies—and what doesn’t

529 funds can be used for eligible K–12 tuition (up to $10,000 per year per student), as well as for colleges, universities, and vocational schools that participate in federal student aid programs.

Room and board expenses qualify only up to limits set by the school’s official cost of attendance—and the student must be enrolled at least half time. Off-campus housing is allowed, but only up to the school’s published allowance.

Textbooks must be required for coursework, and technology purchases must be primarily educational. Entertainment expenses, transportation, insurance, health club fees, and most lifestyle costs are not eligible and must be paid from other sources.

When in doubt, confirm expenses with the school’s financial aid office and keep receipts. Withdrawals for nonqualified expenses may result in income tax on earnings and a 10% penalty, though some exceptions apply.

3. Keep detailed records

While your plan provider reports withdrawals, it’s your responsibility to prove that distributions matched qualified expenses. If withdrawals exceed eligible costs, taxes and penalties may apply to the earnings portion. Careful documentation—especially for room and board and technology—can help avoid problems if questions arise later.

4. Choose the right withdrawal method

Withdrawals must occur in the same calendar year that expenses are paid. You can send funds directly to the school, transfer money to your bank account for reimbursement, or use distributions to pay expenses as they arise.

Each option has timing considerations. Selling investments and processing payments can take days or even weeks, so plan ahead—especially for tuition deadlines. Mismatched timing can unintentionally turn a qualified withdrawal into a taxable one.

5. Coordinate 529 withdrawals with education tax credits

Education tax credits can be valuable, but they can’t be used for the same expenses paid by a 529 plan. Families typically choose between using 529 funds or preserving certain expenses to claim either the American Opportunity Tax Credit or the Lifetime Learning Credit. Careful planning is essential, particularly if income limits affect eligibility.

6. Decide which 529 account to tap first

If multiple 529 accounts exist—such as those owned by parents and grandparents—it’s important to coordinate withdrawals. Distributions from grandparent-owned plans can affect financial aid calculations if taken at the wrong time. Aligning withdrawal strategies early can help minimize unintended aid reductions.

7. Handle leftover funds thoughtfully

If money remains after graduation, you still have options. Funds can stay invested for graduate school, be reassigned to another family member, rolled into another child’s 529 plan, or—under certain conditions—transferred to a Roth IRA under SECURE 2.0 rules.

Scholarships also create flexibility. Withdrawals up to the amount of a scholarship avoid the 10% penalty, though earnings are still taxable.

8. Understand how 529 plans affect financial aid

In most cases, parent-owned 529 accounts have a relatively modest impact on federal financial aid calculations, while assets owned directly by the student tend to reduce aid more significantly. Using 529 funds strategically may also reduce the need for high-interest student loans.

9. Protect your savings as college approaches

As withdrawals near, preserving gains becomes just as important as growth. Many plans automatically shift toward conservative investments over time, but it’s still wise to review your allocation. Creating a clear withdrawal plan with all contributors helps ensure funds are available when needed—and used wisely.

Bottom Line

With thoughtful planning and coordination, a 529 plan can be a powerful tool for covering education costs while minimizing taxes and penalties. Taking time to understand the rules before withdrawals begin can help stretch your savings further and reduce stress during an already busy college transition.

Sources:

https://www.fidelity.com/learning-center/personal-finance/college-planning/college-529-spending

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.