529 Plans: Distributions
  1. 529 Plans: Introduction
  2. 529 Plans: Types Of Plans
  3. 529 Plans: Eligibility
  4. 529 Plans: Contributions
  5. 529 Plans: Distributions
  6. 529 Plans: Conclusion

529 Plans: Distributions

By Denise Appleby

Distributions from 529 plans used for qualified education expenses are tax- and penalty-free if the amount is equal to or less than the designated beneficiary's qualified education expenses. For distributions that are more than the individual's qualified education expenses, the earnings may be subject to tax and an additional 10% early-distribution penalty. Some states allow qualified individuals, as defined by the state, to claim tax deductions for contributions they make to 529 plans. If a tax deduction is allowed, state taxes may also apply to a distribution of amounts other than earnings.

Qualified Education Expenses
Generally, qualified education expenses include the following:

  • Expenses required for the designated beneficiary's enrollment in and attendance at an eligible school. Eligible schools include colleges, universities, vocational schools and accredited post-secondary educational institutions that are eligible to participate in a student aid program administered by the Department of Education.
  • Tuition and fees
  • Books, supplies and equipment
  • Academic tutoring
  • Room and board
  • Uniforms
  • Transportation
  • Expenses of a special needs beneficiary that are necessary for that person's enrollment or attendance at an eligible educational institution.

Tax Treatment of Distributions
A distribution from a 529 plan that is not used for qualified educational expenses may be subject to income tax and an additional 10% early-distribution penalty. The penalty will be waived, however, if the distribution occurs for any of the following reasons:

  • The designated beneficiary dies, and the distribution goes to another beneficiary or to the estate of the designated beneficiary.
  • The designated beneficiary becomes disabled. A person is considered disabled if there is proof that he or she cannot do any substantial gainful activity because of a physical or mental condition. A physician must determine that the individual's condition can be expected to result in death or continue indefinitely.
  • The designated beneficiary receives any of the following:
    • a qualified scholarship excludable from gross income
    • veterans' educational assistance
    • employer-provided educational assistance
    • any other nontaxable payments (other than gifts, bequests or inheritances) received for education expenses
  • The distribution is included in income only because the qualified education expenses were taken into account in determining the Hope Credit or Lifetime Learning Credit, both of which are tax credits that reduce the amount of taxable income for an individual funding a student's education.

On a state level, the tax treatment for distributions varies. Individuals should consult with their tax professional to determine how distributions from their 529 plans will be treated for tax purposes.

529 Plans: Conclusion

  1. 529 Plans: Introduction
  2. 529 Plans: Types Of Plans
  3. 529 Plans: Eligibility
  4. 529 Plans: Contributions
  5. 529 Plans: Distributions
  6. 529 Plans: Conclusion
RELATED TERMS
  1. Non-Qualified Distribution

    1) A distribution from a Roth IRA that occurs before the Roth ...
  2. Lifetime Learning Credit

    A provision of the U.S. federal income tax code that lets parents ...
  3. Education Credit

    A type of tax credit available to students of a post-secondary ...
  4. Coverdell Education Savings Account - ESA

    A tax-deferred trust account created by the U.S. government to ...
  5. 529 Plan

    529 is a category of plans that provide tax advantages when saving ...
  6. Form 1099-Q

    An IRS form that an individual who receives distributions from ...
RELATED FAQS
  1. What is the best way to save for private school expenses? A 529 plan, a Coverdell ...

    If the goal is to put the money in the plan towards private school expenses, then the Coverdell Education Savings Account ... Read Answer >>
  2. Can my IRA be used for college tuition?

    Find out how to use your IRA retirement savings to pay for your college tuition, including what institutions and expenses ... Read Answer >>
  3. Can 529 plans be used to transfer wealth to other family members if the original ...

    Yes, the 529 plan (also known as a "qualified tuition program") allows you to distribute and roll over funds from one 529 ... Read Answer >>
  4. What is the Education Savings Bond Program?

    Learn about the education savings bond program and find out if you are eligible to use your savings bonds for payments toward ... Read Answer >>
  5. What are the risks involved in a banker's acceptance?

    Learn about the different kinds of college savings accounts, how they can benefit a college saver and how to open these savings ... Read Answer >>
  6. Can I contribute to both a 529 plan and a Coverdell education savings account?

    You can contribute to both, and when your child is ready to attend college, as colleges do accept payments from both. There ... Read Answer >>
Trading Center