If your withdrawals are equal to or less than your qualified higher education expenses (QHEEs), then your withdrawals including all your earnings are tax-free. But if you are using your 529 plan for room and board expenses, it’s smart to keep those receipts.

What is the penalty for taking money out of a 529 account?

Only the earnings portion of a non-qualified 529 plan distribution is subject to a 10% withdrawal penalty. California imposes an additional 2.5% state income tax penalty on the earnings portion of non-qualified 529 plan distributions.

Can I withdraw 529 funds for prior year expenses?

Although you will not find this rule explicitly stated anywhere in the IRS’ publications or tax forms, the withdrawals you take from your 529 account must match up with the payment of qualifying expenses in the same tax year.

How does a withdrawal from a 529 account work?

How Withdrawals Work. As a 529 account owner you are effectively reimbursing yourself for higher education expenses when making a withdrawal. Most often this is direct school expenses like tuition and housing, but a qualified withdrawal can be made for any QHEE.

Can a parent take money out of a 529 plan?

Just be sure to keep accurate records in the event of an audit, as 529 plans are self-reporting, and to not make withdrawals from separate 529 accounts for the same expense. If grandpa and the parent both have 529 accounts, only one of them can claim the groceries as a qualified expense.

How does a 529 college savings plan work?

Qualified 529 plan expenses With a 529 college savings plan, investments grow tax-deferred and are not taxed when withdrawn to pay for qualified higher education expenses, including tuition, fees, textbooks, supplies and equipment required for enrollment, special needs services and, in some cases, room and board costs.

Can a 529 account be used for qualifying expenses?

It’s important that withdrawals you take from your 529 savings account match the payment of qualifying expenses in the same tax year. Like some families, you may choose to pay the school directly from your 529 account for ease in recordkeeping and matching distributions to school expenses.