Money withdrawn from a 529 plan avoids federal income tax and the 10% penalty only when it pays for a qualified education expense. The list of 529 plan qualified expenses covers tuition and fees, required books and supplies, computers and internet service, room and board within limits, K-12 tuition up to $10,000 a year, registered apprenticeship costs, and up to $10,000 in student loan repayment per beneficiary. Anything outside that list is a non-qualified withdrawal, and the earnings portion gets taxed and penalized.
Qualified Expenses for College and Vocational School
The core categories for post-secondary education are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible institution.1Legal Information Institute. 26 USC 529(e)(3)(A) An eligible institution is any college, university, or vocational school that participates in federal student aid programs. Books and supplies do not need to appear on a specific course syllabus; the statutory standard is what is required for enrollment or attendance, which is broader than many account holders assume.
Room and board qualify when the student is enrolled at least half-time. On-campus housing is covered up to the actual amount the school charges. For off-campus housing, the tax-free amount is capped at the room and board allowance the school publishes in its official cost of attendance, or the amount you actually pay, whichever is lower.1Legal Information Institute. 26 USC 529(e)(3)(A) Keep the school’s published cost of attendance for each academic year, because that figure is the ceiling for off-campus withdrawals.
Computers, peripherals like printers and monitors, educational software, and internet access all qualify as long as the beneficiary uses them primarily during their years of enrollment.1Legal Information Institute. 26 USC 529(e)(3)(A) These purchases do not need to be required for a particular class. A laptop bought the summer before freshman year qualifies. So does the monthly internet bill.
For beneficiaries with disabilities, qualified expenses also include special needs services and equipment necessary to participate in coursework. Adaptive technology such as screen readers, mobility equipment, and sensory tools qualify when the student needs them to attend class or complete assignments. Save receipts and any documentation from the school confirming the equipment is necessary.
Study abroad is covered, but only when the foreign institution participates in federal student aid programs. You can verify a school’s status through its federal school code. Tuition, fees, books, and room and board at a qualifying international school follow the same rules as a domestic one. Airfare, international health insurance, and phone plans are not covered.
K-12 Tuition, Apprenticeships, and Student Loan Repayment
Federal law expanded 529 plans beyond college to cover tuition at elementary and secondary schools, public, private, and religious. The annual limit is $10,000 per beneficiary across all 529 accounts held for that student.2Internal Revenue Service. 529 Plans Questions and Answers Only tuition qualifies at the K-12 level. K-12 books, uniforms, and transportation do not. Some states do not conform to this federal provision and may treat K-12 withdrawals as non-qualified for state tax purposes, so check your state’s rules before withdrawing.
The SECURE Act of 2019 added two more categories. First, apprenticeship programs registered with the U.S. Department of Labor, covering fees, textbooks, supplies, and required equipment. Second, student loan repayment, up to $10,000 over the beneficiary’s lifetime. Each of the beneficiary’s siblings also gets a separate $10,000 lifetime limit for loan repayment.3Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs The loan provision is especially useful when a 529 has money left after graduation.
What Doesn’t Qualify
Several costs that feel like part of the college experience are firmly excluded. Transportation never qualifies, whether that means a car payment, gas, a bus pass, rideshare, or a flight home. Health insurance premiums and medical bills do not qualify either, even when the school requires students to carry coverage. Extracurricular fees for sports, clubs, fraternities, and sororities are also excluded.
Personal expenses like gym memberships, entertainment, and food purchased outside a meal plan fall outside the definition. Smartphones do not qualify unless the school specifically requires one for coursework, which is rare. The general test: if the expense is not directly tied to enrollment, attendance, or completing academic work at an eligible institution, it does not qualify.
Coordinating With Education Tax Credits
You can claim the American Opportunity Tax Credit or Lifetime Learning Credit in the same year you take a 529 distribution. You cannot use the same expenses for both benefits. The IRS calls this the double-dipping prohibition, and it is one of the most common 529 mistakes.4Internal Revenue Service. Publication 970 – Tax Benefits for Education
The math works like this. Start with total qualified education expenses. Subtract any tax-free assistance the student received, such as scholarships, Pell Grants, or employer tuition benefits. Then subtract the expenses used to claim an education tax credit, up to $4,000 for the AOTC. What remains is your adjusted qualified education expenses, and that is the ceiling for tax-free 529 withdrawals.4Internal Revenue Service. Publication 970 – Tax Benefits for Education
An example. Your student has $20,000 in qualified expenses, receives a $3,000 scholarship, and you claim the AOTC using $4,000 of expenses. Your adjusted qualified amount is $13,000. Withdraw more than $13,000 from the 529 and the excess is a non-qualified distribution.
Taxes and Penalties on Non-Qualified Withdrawals
When a withdrawal exceeds your adjusted qualified expenses, the earnings portion of the excess is included in the recipient’s taxable income and hit with an additional 10% federal tax penalty.3Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs Only the earnings are taxed and penalized. Your original contributions come back tax-free because you already paid income tax on that money.
The 10% penalty is waived in a few specific situations, though ordinary income tax on the earnings still applies:
- Scholarships. You can withdraw an amount equal to a tax-free scholarship the student received without the penalty.
- Disability. The penalty is waived if the beneficiary becomes disabled.
- Death. Distributions after the beneficiary’s death are penalty-free.
- Military academy. If the beneficiary attends a U.S. military academy, withdrawals up to the cost of attendance are penalty-free.
The scholarship exception trips people up. A $5,000 scholarship does not make $5,000 of spending qualified. It means you can pull $5,000 out of the 529 without the 10% penalty, but you still owe income tax on whatever portion of that $5,000 represents investment earnings.
Options for Leftover 529 Money
If the original beneficiary earned a full scholarship, skipped college, or the account is simply overfunded, you can change the beneficiary to another qualifying family member without triggering taxes or penalties.3Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs The definition of family member is generous: the beneficiary’s spouse, children, siblings, parents, grandparents, nieces, nephews, aunts, uncles, in-laws, and first cousins. There is no limit on how many times you can change the beneficiary, and the account can pass through generations while investments continue growing tax-deferred.
Starting in 2024, the SECURE 2.0 Act allows rolling leftover 529 funds directly into a Roth IRA in the beneficiary’s name. The lifetime cap is $35,000 per beneficiary, with several conditions:
- The 529 must have been open for at least 15 years.
- Only contributions made at least five years before the rollover date are eligible.
- Each year’s rollover counts toward the beneficiary’s annual Roth IRA contribution limit, which is $7,500 for 2026.5Internal Revenue Service. Retirement Topics – IRA Contribution Limits
- The beneficiary needs earned income at least equal to the rollover amount.
At the maximum $7,500 per year, reaching the $35,000 lifetime cap takes at least five years of rollovers. The Roth IRA must be in the beneficiary’s name, not the account owner’s. Combined with any other Roth contributions the beneficiary makes that year, the total cannot exceed the annual limit.