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

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

Related Articles
  1. Personal Finance

    Spoil Your Grandkids, Cut Your Tax Bill

    Helping your grandchildren save for college is a way to spoil them and reap some benefits yourself.
  2. Personal Finance

    529 Plan Tutorial

    This comprehensive guide goes through what a 529 plan is and how to set one up, contribute to it and withdraw from it.
  3. Personal Finance

    Choosing The Right 529 Education Savings Plan

    Before you fund one of these education-savings vehicles, be sure you know their differences.
  4. Financial Advisor

    Advising FAs: Explaining College Savings Accounts to Clients

    There are several types of savings accounts designed for higher education available today. The right one for you will depend upon factors such as your tax bracket, time horizon, investment objectives ...
  5. Retirement

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  6. Retirement

    Don't Forget The Kids: Save For Their Education And Retirement

    Retirement and education financing are the two most important planning items for taxpayers.
  7. Retirement

    Tough Times: Should You Dip Into Your Qualified Plan?

    401(k)s, pensions and profit-sharing plans can be a source of cash, but there are consequences to this option.
  8. Personal Finance

    Top Tax Refunds For Recent Grads

    Don't miss out on these tax credits if you have recently graduated.
  9. Personal Finance

    Investing In Your Child's Education

    Overwhelmed by increasing tuition costs for your kids? The U.S. government can help.
  10. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

    To take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
Trading Center