How to Spend 529 Funds: Qualified Expenses, Withdrawals, and Leftovers

You can spend 529 funds tax-free on a defined list of education costs: tuition and required fees, books and supplies, a computer and internet access used for school, room and board within the school’s published allowance, K-12 tuition up to $20,000 per year, registered apprenticeship costs, and up to $10,000 in lifetime student loan payments per beneficiary. Anything outside that list is a non-qualified withdrawal, and the earnings portion gets ordinary income tax plus a 10% federal penalty. The mechanics matter almost as much as the list: the withdrawal has to happen in the same calendar year you pay the expense, and you have to keep 529 spending separate from expenses you use to claim an education tax credit.

What Counts as a Qualified Expense at College

At an eligible college, university, or vocational school, the tax code lets you use 529 money for tuition and any fees required for enrollment, plus books, supplies, and equipment a student needs for coursework. Computers, printers and other peripherals, software, and internet access qualify as long as the beneficiary uses them primarily while enrolled. Software built for games, sports, or hobbies is out unless it’s predominantly educational.¹

For a beneficiary with special needs, services connected to enrollment and attendance also qualify, including adaptive equipment and support services that wouldn’t otherwise fit the standard categories.¹

Room and Board

Room and board is often the biggest 529-eligible expense, but two conditions apply. The student has to be enrolled at least half-time in a degree or certificate program, and the amount you withdraw for housing and meals can’t exceed the room and board allowance the school includes in its official cost of attendance. Schools publish those figures for financial aid purposes; the financial aid office’s website is usually the fastest place to find them.¹

Off-campus students can still use 529 money for rent and groceries, capped by the school’s published off-campus allowance. Spend less than that ceiling and you’re fine. Spend more, and the excess becomes non-qualified.

K-12 Tuition, Apprenticeships, and Student Loans

529 plans reach beyond college. You can withdraw up to $20,000 per beneficiary per year for tuition and certain other educational expenses at public, private, or religious K-12 schools. That cap applies across every 529 account held for the same child, so separate accounts held by parents and grandparents share one $20,000 ceiling. Transportation, uniforms, and similar non-educational costs still don’t qualify.¹

Registered apprenticeship programs also qualify. The program has to be registered and certified with the U.S. Department of Labor, and you can pay fees, textbooks, supplies, and required equipment such as trade tools.¹

For student loans, you can apply up to $10,000 over the beneficiary’s lifetime toward principal or interest on qualified education loans. The same $10,000 lifetime limit is available separately for each of the beneficiary’s siblings, so a family with three children could use up to $30,000 across all of them.² The $10,000 is per person and per lifetime, tracked in the aggregate across any 529 accounts naming the same beneficiary.

Coordinating with Education Tax Credits

You cannot use the same dollar of tuition to claim both a tax-free 529 withdrawal and the American Opportunity Tax Credit or the Lifetime Learning Credit. The IRS requires you to reduce your qualified 529 expenses by any amount used to generate one of those credits.³

The American Opportunity Tax Credit is worth up to $2,500 per student, calculated on the first $4,000 of qualifying tuition and fees. A common approach is to pay $4,000 out of pocket or from non-529 savings to claim the full credit, then use 529 funds for the rest of the tuition, room and board, books, and other qualified costs. Computer expenses, software, and internet access are generally not eligible for the education credits, so paying those from the 529 avoids any overlap.²

Skip this coordination and the IRS can reclassify part of your 529 distribution as non-qualified, triggering income tax and the 10% penalty on the earnings portion.

How to Request a Withdrawal

Most 529 plans let you request distributions through an online portal where you enter the amount, choose the payee, and provide the beneficiary’s information. Some plans also accept a paper distribution request form. Either way, allow several business days for processing and request funds before the school’s tuition deadline.

You’ll need the beneficiary’s Social Security number or taxpayer identification number, an amount matched to current invoices or billing statements, and either the school’s federal school code or its mailing address for direct payments.²

Choosing the Payee

You can direct payment to the school, to the beneficiary, or to yourself as the account owner. Where the money goes determines whose name is on the Form 1099-Q. If the check goes to the school or the student, the 1099-Q is issued in the student’s name. If it goes to the account owner, the 1099-Q is issued in the owner’s name.⁴ Having the form in the student’s name can simplify things if any portion ends up non-qualified, since the student is often in a lower tax bracket.

Match the Withdrawal to the Calendar Year

The 529 withdrawal has to happen in the same calendar year you pay the expense. Pay a spring tuition bill in December and the withdrawal needs to happen in December too. Waiting until January puts the withdrawal in a different tax year than the expense, which can make it look non-qualified on paper even when the underlying expense was legitimate.

When a Withdrawal Isn’t Qualified

If you spend 529 money on something outside the qualified list, only the earnings portion faces consequences. Your original contributions came from after-tax dollars and come back tax-free and penalty-free no matter how they’re spent. The earnings get added to your taxable income and hit with an additional 10% federal tax, unless one of the exceptions below applies.⁵

Every distribution is split pro rata between contributions and earnings. If your account is 70% contributions and 30% earnings, a $10,000 non-qualified withdrawal includes $3,000 in earnings subject to income tax and the penalty, and $7,000 in contributions that come back clean.

State taxes are a separate layer. Most states that offer a deduction or credit for 529 contributions will recapture that benefit when you make a non-qualified withdrawal, so you could owe back the state tax savings you originally received. Rules vary by state.

Exceptions That Waive the 10% Penalty

Several situations remove the 10% additional tax on the earnings portion. Ordinary income tax on those earnings usually still applies, but dropping the penalty alone can save a meaningful amount.

Scholarships: if the beneficiary receives a tax-free scholarship, fellowship, or grant, you can withdraw up to the scholarship amount penalty-free.
Death or disability of the beneficiary.
Attendance at a U.S. military academy such as West Point or Annapolis, up to the cost of advanced education attributable to that attendance.
Distributions up to the amount the beneficiary receives in tax-free employer educational assistance.
Distributions up to the amount the beneficiary receives in tax-free veterans’ educational assistance.
Distributions taxable only because the expenses were used to claim the American Opportunity or Lifetime Learning Credit.

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Records to Keep

Early in the year following your withdrawal, the plan administrator issues IRS Form 1099-Q. It reports the total gross distribution, the earnings portion, and your basis in the contributions.⁴ The form doesn’t tell the IRS whether your withdrawal was qualified. That’s on you.

Keep every receipt, invoice, and billing statement showing what you paid, when, and to whom. For room and board, save the school’s published cost-of-attendance figures for the academic year. For computers and equipment, keep purchase receipts and enough documentation to show the beneficiary used the item primarily for school. Before pulling any funds, check that your total distributions across all 529 accounts for the beneficiary don’t exceed total qualified expenses after subtracting scholarships and any expenses used for education tax credits.⁶

What to Do with Money Left Over

If the beneficiary finishes school with a balance in the account, you have options that avoid the non-qualified penalty entirely.

Change the Beneficiary

You can transfer the account to another family member with no tax consequences. Siblings are the most common choice, and the definition of “member of the family” is broad, covering the beneficiary’s spouse, children, parents, nieces, nephews, and first cousins, among others. You can also roll funds from one beneficiary’s 529 into another family member’s 529 without triggering taxes.²

Roll Over to a Roth IRA

Since 2024, the SECURE 2.0 Act allows unused 529 funds to be rolled directly into a Roth IRA in the beneficiary’s name. The rules are strict:

The 529 must have been open for at least 15 years.
Contributions made within the last five years, and their earnings, can’t be rolled over.
The rollover counts toward the beneficiary’s IRA contribution limit for the year, which is $7,500 for 2026 for those under 50. Any other IRA contributions the beneficiary makes that year reduce the available rollover dollar for dollar.
Lifetime cap of $35,000 per beneficiary.
The transfer has to move trustee-to-trustee between the 529 and the Roth IRA.

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At $7,500 a year, reaching the $35,000 lifetime cap takes about five years. The 15-year account clock and five-year lookback on contributions mean the flexibility is greatest for accounts opened early.

Transfer to an ABLE Account

If the beneficiary or a family member has a qualifying disability, 529 funds can roll into an ABLE (Achieving a Better Life Experience) account, which provides tax-advantaged savings for disability-related expenses. The rollover is subject to the ABLE account’s annual contribution limit.⁸

Keep the Account Open

There’s no deadline to use 529 money. If the beneficiary might pursue graduate school, a professional certification, or an apprenticeship later, keeping the account open lets the investments continue growing tax-deferred, and you can change the beneficiary later if plans shift.

1
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
2
Internal Revenue Service. 529 Plans: Questions and Answers
3
Office of the Law Revision Counsel. 26 U.S. Code 529 – Qualified Tuition Programs
4
Internal Revenue Service. Instructions for Form 1099-Q (04/2025)
5
Internal Revenue Service. Publication 970 (2025), Tax Benefits for Education
6
Internal Revenue Service. 1099-Q What Do I Do?
7
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
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Internal Revenue Service. ABLE Accounts – Tax Benefit for People with Disabilities