Ready to use your 529 funds? Here's what you need to know (2024)

Think back to the day you opened your child’s 529 college fund. Remember what life was like back then?

Your little one was still … well, little. Your cell phone was just for making phone calls. And you did most of your shopping in an actual store.

Yep, a lot has changed since you started saving for college. Now your little one is making their college decision and you’re left wondering: How do I spend the money I’ve been saving all these years for their college education?

A lot of parents have asked these same questions, so don’t be alarmed. Here are answers to some frequently asked questions on how to withdraw money from your 529.

All 529 funds must be used to help pay for education expenses. Prior to 2018, those expenses were limited to college or other secondary schooling. Now, you can also use 529 funds to cover expenses for private elementary, middle, and high school tuition.

All withdrawals for education-related expenses are tax free, as long as they are “qualified expenses.” Some examples of qualified expenses include:

• Tuition and fees
• Room and board (if your child is enrolled on at least a half-time basis)
• Books and supplies
• Transportation

The sum of all qualified expenses for the academic year is referred to as the school’s cost of attendance (COA). Think of this as the school’s price tag. You can find this information posted on the school’s website.

Keep in mind that a school’s COA adjusts each year and can vary depending on a few factors. For instance, is your child paying in-state or out-of-state tuition? Are they living on campus, off campus, or commuting? These variables will impact your child’s cost of attending that school.

The school’s COA helps determine how much you can withdraw from your 529 for that year. Take the COA and subtract any grants, scholarships, and other tax-free assistance your child received. The difference tells you how much you can withdraw from your 529 for that year, which is called your adjusted qualified higher education expenses (QHEE).

The school’s adjusted QHEE is the maximum amount you can withdraw, tax free, from your 529 for that year. Any further withdrawals beyond that adjusted QHEE are referred to as “non-qualified withdrawals,” which are subject to tax and penalties.

Non-qualified withdrawals are not tax free. Making only qualified withdrawals allows you to stretch every dollar of your college savings fund.

If you do make a non-qualified withdrawal, the principal portion of the disbursem*nt (that portion which you contributed yourself) won’t be taxed. However, the earnings on a non-qualified withdrawal are classified as taxable income — plus you could pay an additional 10% federal penalty tax on those earnings as well.

Non-qualified withdrawals are typically incurred by either withdrawing more than the adjusted QHEE or by using the funds for non-qualified expenses (like renting a more expensive off-campus apartment or buying a roundtrip ticket for spring break).

All 529 accounts require you to request funds in the same calendar year that the qualified expense occurs in. Don’t confuse that with the school year. Otherwise, what would normally have been a qualified tax-free expense could become a penalized non-qualified one.

For example, let’s say you withdrew $30,000 from your 529 in November 2019 to cover your child’s tuition bill for the 2019-2020 school year. But instead of paying the bill right away, you wait until January 2020 to make the tuition payment. This delay means that the $30,000 withdrawal will count against your 2020 expenses. Therefore, if your adjusted QHEE for 2020 was $50,000, you could only take out $20,000 more in tax-free withdrawals. If you still needed to withdraw the remaining $30,000 for 2020 anyway, the earnings on that amount would be considered taxable income and could also incur the 10% penalty.

That’s why it’s so important to make your withdrawals in the year the payment is due. Otherwise you risk losing a portion of your hard-earned funds to penalties instead of using it for its true purpose: paying for your child’s education.

Now that you have a better understanding of the rules, it’s time to focus on the “how” part of your question. You can disburse funds from your 529 in one of three ways:

1. Send payment directly from the 529 to the school.
2. Send payment to your home, deposit it into your account, and then send it to the school.
3. Send payment to your home, deposit it into your child’s account, and then have them send it to the school.

When making withdrawals from your 529, you’ll be asked whether the funds will be used for qualified expenses. Otherwise, there’s no documentation or proof that you need to provide after completing your withdrawal and making your payment. But it’s still smart to hold onto your receipts in case questions come up in the future.

To make your records more transparent, make sure you purchase qualified items separately from non-qualified ones. So if you’re buying a laptop for your child, ring that out separately from the new home entertainment system you’re buying for yourself. That way the legitimacy of your 529 purchases cannot be contested.

Then you have a couple of options.

First of all, you could keep the funds sitting tax free in the 529 in case your child decides to go to grad school or some other secondary school later, then withdraw again at that time.

As a second option, if you don’t anticipate your child going back to school, you can roll over the remaining balance to the 529 of one of your other children, or another qualified recipient, such as a niece or nephew.

Lastly, instead of rolling over the funds, you could change the beneficiary listed on the account.

You may feel overwhelmed about paying for your child’s college. After running this savings marathon, you don’t want to trip at the finish line.

That’s OK; every parent who’s ever sent their child to college has been in your shoes before. They’ve had the same questions and experienced the same uncertainties. But just as they’ve figured it out, so can you. Just make sure you do your research and speak up when you have a question. For starters, the school’s financial aid office is a good resource, so reach out to them — or even your lender — when you feel you need some help.