A 529 plan is one of the most powerful tools for building a tax-advantaged future for your child’s education. From federal and often state tax-free growth to flexible usage options for K-12, college, and even student loans, these plans make saving for education a no-brainer for savvy parents and grandparents who want to maximize every dollar.
529 plans offer a big tax advantage—qualified withdrawals are free from federal income tax and usually free from state income tax too. But not all withdrawals are tax-free, even when you have significant education expenses. Here’s what you need to know about 529 withdrawals in 2024.
- Payment Options
As the account owner, you can decide how to receive the money. Withdrawals can be sent to:
• Your account
• The beneficiary (the student)
• The educational institution directly
Choose your payment option by submitting a withdrawal request to your 529 plan. - Custodial Account Rules
If your 529 plan was funded with money from a custodial account (like UGMA or UTMA), those funds legally belong to the beneficiary (your child or grandchild). Withdrawals must benefit them and can’t be used for your personal expenses. - IRS Monitoring
The IRS tracks all withdrawals through Form 1099-Q, which reports the distribution. If the funds go to you, the form is issued in your name. If the funds go to the beneficiary, the form is issued in their name. - Taxable Withdrawals
Withdrawals are tax-free if they don’t exceed Adjusted Qualified Education Expenses (AQEE).
AQEE includes:
• Tuition, fees, and required materials
• Room and board for half-time students
• Computer equipment and internet
• K-12 tuition (up to $10,000 annually)
• Student loan payments (lifetime max: $10,000)
Subtract tax-free aid like scholarships and tax credits to calculate AQEE.
- Non-Education Withdrawals
If you use funds for non-education purposes, the earnings are taxed and may face a 10% penalty. Penalties don’t apply if the beneficiary dies, becomes disabled, or attends a U.S. military academy. - Tax-Free Self-Education
You can change the beneficiary to yourself and withdraw tax-free funds for your education if the account was funded with your own money.
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