529 plan withdrawal tips for the first year of college

A milestone for high school graduates — and for their parents — is coming soon. Students will be starting college, and parents will be getting the first tuition bill. Now’s the time for parents, grandparents, and others with 529 college savings plans for a first-year college student to start planning withdrawals. Here are some tips for withdrawals from 529 plans.

Know what’s a qualified expense

Withdrawals must be used for qualified expenses to be tax-free. Tuition isn’t the only qualified expense. Think education essentials.

• School tuition: Tuition and fees for post-secondary schools, vocational and trade schools, and elementary or secondary school
• Living essentials: On-campus room and board, meal plans, off-campus rent (up to the cost of on-campus room and board), or special needs accommodations
• Classroom essentials: Books, school supplies, electronic devices, and computer software required by the school
• Additional uses: Internet access fees or student loan repayments ($10,000 lifetime limit)

If you use 529 plan funds for non-qualified expenses, you'll have to pay federal income taxes and a 10% penalty on the earnings portion of the withdrawal. 

Maximize other tax credits first

If you qualify for the American Opportunity Tax Credit (AOTC), up to $2,500 per student when they spend $4,000 on tuition, fees, and textbooks, or the Lifetime Learning Tax Credit (LLTC), up to $2,000 per student, you can still take advantage of one per year and pay for qualified expenses with a 529 plan.¹ (Each tax credit has adjusted gross income limits.) Plan to pay the tax credit amount from another account, so you can claim the tax credit. You can’t claim the AOTC or LLC on expenses that are paid from a 529 plan.

Decide who gets the funds

Money from a 529 plan can be disbursed to the account owner to pay the student beneficiary’s expenses, the student beneficiary, or the educational institution. Direct payments to schools can ensure that funds are used as intended, but account owners should check to see how the school handles 529 plan payments.

Time withdrawals by tax year

Tax years and academic years don’t align. Withdrawals made from 529 plans must be used during the current tax year to be considered tax-free. College academic years can span two calendar years. For instance, the spring term, which typically begins in January, is usually billed in December. If you withdraw the funds in December, you need to pay the bill before Jan. 1. If you plan to pay the expense after Jan. 1, you need to withdraw 529 plan funds after that date to avoid taxes.

Coordinate withdrawals from multiple 529 plans

If the student is a beneficiary on other 529 plans — from a grandparent, aunt, uncle, or family friend, for instance — it’s important to coordinate withdrawals. Account owners need to discuss withdrawals and coordinate who will pay which expenses. It’s critical to not withdraw money that won’t be used for qualified expenses in that same tax year. The account owner would have to pay taxes and a penalty on the earnings portion. 

Good news for the 2023–2024 school year: Withdrawals from a grandparent or non-parent-owned 529 plan will not be considered student income. They don’t need to be reported on a student’s Free Application for Federal Student Aid (FASFA®) application starting this year.

Don’t stop saving

If you haven’t saved enough to cover four years of college expenses, keep contributing if you can. This gives the money the potential to grow tax-free, and you may also get a state tax deduction.

Just as you saved diligently in a 529 plan, you need to be just as diligent about taking withdrawals and when and how you use the money. It’s just as important.

Get answers to 529 plan frequently asked questions.