How to Use 529 Funds: What Qualifies and What Doesn’t

You can use 529 funds tax-free for a defined list of education costs: tuition and required fees, books, supplies, and equipment at an eligible school; computers and internet access used primarily by the student; room and board if the student is enrolled at least half-time; up to $10,000 a year in K-12 tuition; fees, books, and equipment for a registered apprenticeship; and up to $10,000 in student loan repayment per beneficiary as a lifetime cap. Spend the money on anything else and the earnings portion gets hit with income tax plus a 10% federal penalty.¹ Knowing what qualifies before you request a distribution is what keeps a 529 withdrawal tax-free.

What Counts as a Qualified Higher Education Expense

For college and other postsecondary schooling, the core qualified expenses are tuition, required fees, books, supplies, and equipment required for enrollment or attendance at an eligible institution. Computers, peripheral equipment, software, and internet access qualify as long as the beneficiary uses them primarily during their years of enrollment.¹ Software for sports, games, or hobbies doesn’t count unless it’s predominantly educational.²

Special needs services and equipment qualify when they’re necessary for the student to enroll and attend classes at an eligible institution.² That can cover adaptive technology, specialized tutoring, or other accommodations a student with a disability needs to participate in coursework.

Room and Board

Room and board qualifies only when the beneficiary is enrolled at least half-time.¹ The amount you can cover is capped at the greater of two figures: the room and board allowance the school includes in its official cost of attendance for financial aid purposes, or the actual amount charged if the student lives in housing owned or operated by the school.²

For students living off campus, rent and groceries count toward room and board, but the total can’t exceed the school’s published cost-of-attendance allowance for that living arrangement. This is where families trip up. If your off-campus apartment costs more than the school’s allowance, only the allowance amount qualifies, and the excess is treated as a non-qualified withdrawal.

Which Schools Qualify

An eligible institution is any college, university, vocational school, or other postsecondary school that participates in federal student aid programs administered by the U.S. Department of Education. That covers most accredited schools in the United States and a number of international institutions. The Department of Education publishes a list of foreign schools that participate in federal student loan programs, and attendance at those schools qualifies for tax-free 529 distributions.³

K-12 Tuition, Apprenticeships, and Student Loans

Federal law has expanded 529 plans well beyond traditional four-year degrees, and each expanded use comes with its own dollar cap.

K-12 Tuition

You can withdraw up to $10,000 per year per beneficiary to pay tuition at an elementary or secondary public, private, or religious school.⁴ The $10,000 cap applies per beneficiary, not per account. If two separate 529 accounts exist for the same child, the combined K-12 withdrawals across both accounts can’t exceed $10,000 for the year.

Beginning in 2025, the K-12 list broadened beyond tuition to include curriculum materials, books, online educational materials, tutoring by qualified instructors, fees for standardized achievement tests and AP exams, dual-enrollment tuition at a college, and educational therapies for students with disabilities provided by licensed practitioners.² Home schooling expenses remain excluded.

Registered Apprenticeships

Fees, books, supplies, and equipment required for a registered apprenticeship program qualify for tax-free 529 distributions.² The apprenticeship must be officially registered and certified by the U.S. Department of Labor or a state apprenticeship agency.⁵

Student Loan Repayment

Up to $10,000 in 529 funds can go toward repaying qualified student loans of the beneficiary. The same $10,000 limit applies separately to each of the beneficiary’s siblings, so a family with three children could potentially use up to $30,000 across all of them.² This is a lifetime cap per person, not an annual one.

Expenses That Don’t Qualify

Several costs feel education-related but aren’t qualified expenses, and using 529 funds for them will trigger taxes and the 10% penalty on the earnings portion. The most common traps:

Transportation. Gas, car payments, bus passes, and flights to and from school are never qualified, however necessary they feel.
Health insurance. Student health insurance premiums are not covered, even when the school requires them.
Sports, clubs, and Greek life. Fees to join a team, club, fraternity, or sorority are excluded.
College application and testing fees. Application fees and college entrance exam costs like the SAT and ACT don’t qualify at the postsecondary level.
Room and board below half-time. If the student drops below half-time enrollment, housing and meal expenses stop qualifying.

A working rule: if the school doesn’t require it for enrollment or attendance, it probably doesn’t qualify. When in doubt, check whether the expense appears in the school’s official cost of attendance before using 529 funds.

What Happens If You Use Funds for Something Else

When 529 money goes toward anything other than a qualified expense, the earnings portion of that withdrawal is included in the recipient’s taxable income and hit with an additional 10% federal penalty tax.¹ Only the earnings are taxed and penalized. Your original contributions come back tax-free because they were made with after-tax dollars. Some states also recapture any state income tax deductions previously claimed on contributions, which can add another layer of cost.

The 10% penalty is waived in a few specific situations, though the earnings are still taxed as ordinary income:

Scholarships. If the beneficiary receives a tax-free scholarship, you can withdraw up to the scholarship amount without the 10% penalty. Income tax on the earnings still applies.
Death or disability. Distributions made because the beneficiary dies or becomes permanently disabled are exempt from the penalty.
Military academy attendance. If the beneficiary attends a U.S. military academy, a withdrawal up to the cost of attendance at the academy avoids the penalty.

The scholarship exception catches families off guard most often. When your child receives a full-ride scholarship, you might assume withdrawing the leftover 529 balance triggers the full penalty. It doesn’t, as long as the withdrawal doesn’t exceed the scholarship amount.

Coordinating With Scholarships and Education Tax Credits

Before calculating how much to withdraw, subtract any tax-free educational assistance the student receives. Pell Grants, merit scholarships, employer tuition assistance, and veterans’ education benefits all reduce the pool of expenses you can cover with 529 funds. If you use 529 money for costs already covered by a scholarship, the overlapping amount becomes a non-qualified distribution.

The same coordination applies to education tax credits like the American Opportunity Tax Credit and the Lifetime Learning Credit. You can’t claim a tax credit and use 529 funds for the same dollar of expense. The IRS expects you to allocate expenses between the two, so many families pay the first $4,000 of tuition out of pocket to maximize the American Opportunity Credit and cover the rest with 529 distributions. Getting this allocation wrong doesn’t usually trigger the 10% penalty, but it can reduce or eliminate your credit.

How to Request a Distribution

Most 529 plans let you request a withdrawal through their online portal, mobile app, or by mailing a physical distribution form. You’ll need your account number, the amount, and the recipient’s information. Distributions can be sent to three places: directly to the school, to the account owner, or to the beneficiary. Whoever receives the payment gets the year-end tax form, which matters for reporting.

Electronic transfers to a linked bank account are the fastest option and typically process within one to three business days. Plans can also mail a physical check, which takes longer. When tuition deadlines are approaching, factor in processing time. Requests submitted late in December are particularly risky: if the transfer doesn’t clear until January, the distribution falls in the following tax year while the expense you paid may sit in the prior year. Matching distributions and expenses to the same tax year is considered best practice for clean reporting, though there’s no explicit IRS rule requiring it. The safest approach is to request distributions well before the end of the calendar year.

Reporting the Withdrawal on Your Tax Return

After any distribution, the plan administrator sends IRS Form 1099-Q to whoever received the funds.⁶ If the payment went to the account owner, the 1099-Q is issued under the owner’s name and Social Security number. If it went to the beneficiary or directly to the school, the form is issued in the beneficiary’s name.⁷

The form breaks the withdrawal into two components: your original contributions (basis) and the earnings. When the total distribution for the year doesn’t exceed the beneficiary’s adjusted qualified expenses, no part of the distribution is taxable and you generally don’t need to report it as income on your federal return. Keep all tuition bills, receipts, and school cost-of-attendance statements in case the IRS questions whether the distribution was qualified. The plan administrator reports the gross distribution to the IRS but has no way of knowing whether you spent it on tuition or a vacation, so the burden of proof falls on you.

What to Do With Leftover Money

If the original beneficiary finishes school with money left over, or decides not to go to college, the account owner can change the beneficiary to another qualifying family member at any time without triggering taxes or penalties. The IRS defines “family member” broadly to include siblings, step-siblings, parents, children, grandchildren, aunts, uncles, nieces, nephews, first cousins, in-laws, and their spouses. A parent could redirect leftover funds from one child’s account to a younger sibling, a niece, or even themselves to go back to school. Submit a beneficiary change form through the plan.

Roth IRA Rollover

Starting in 2024, the SECURE 2.0 Act allows beneficiaries to roll unused 529 funds directly into a Roth IRA in their name, subject to strict conditions.¹ The rules:

The 529 must have been open for at least 15 years for the current beneficiary.
Contributions made within the last five years, and earnings on them, can’t be rolled over.
The rollover counts against the beneficiary’s annual Roth IRA contribution limit, which is $7,500 for 2026. If the beneficiary also contributes directly to a Roth IRA that year, the combined total can’t exceed $7,500.⁸
The lifetime cap on rollovers is $35,000 per beneficiary.
The beneficiary must have earned income at least equal to the rollover amount for the year.

These rollovers bypass the normal Roth IRA income limits that would otherwise prevent high earners from contributing. The transfer must be a direct trustee-to-trustee rollover. At the $7,500 annual cap, it takes roughly five years to move the full $35,000.

ABLE Account Rollover

Families can also roll 529 funds into an ABLE (Achieving a Better Life Experience) account for a beneficiary with a disability or a qualifying family member with a disability.⁹ The rollover counts toward the ABLE account’s annual contribution limit, which is $19,000 for 2026.¹⁰ If $10,000 has already been contributed to the ABLE account that year, only $9,000 can be rolled over from the 529.

1
Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
2
Internal Revenue Service. Publication 970 – Tax Benefits for Education
3
U.S. Department of Education – Federal Student Aid. International Schools Participating in the Federal Student Loan Programs
4
Internal Revenue Service. 529 Plans – Questions and Answers
5
Apprenticeship.gov. Registered Apprenticeship Program
6
Internal Revenue Service. Instructions for Form 1099-Q (Rev. April 2025)
7
Internal Revenue Service. Form 1099-Q (Rev. April 2025) – Payments From Qualified Education Programs
8
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
9
Internal Revenue Service. ABLE Savings Accounts and Other Tax Benefits for Persons With Disabilities
10
Social Security Administration. Spotlight on Achieving a Better Life Experience (ABLE) Accounts