Taking Money from a 529 Plan

To get the greatest overall benefit from a 529 college savings plan, it's important to keep tabs on withdrawals. Distributions from a 529 plan are tax free if the total amount distributed during the year doesn't exceed the beneficiary's qualified higher education expenses:

• Tuition, fees, books, supplies, and equipment required for the designated beneficiary's enrollment or attendance at an eligible educational institution
• Reasonable costs for room and board (if the student is carrying at least half the normal full-time work load)
• Expenses for certain special needs services

Expenses paid with tax-free educational benefits (such as a scholarship or grant), plus expenses for which an education tax credit or deduction is claimed, don't count toward the tax-free distribution limit.

What happens if the amount taken from the plan is more than the qualified expense limit? Part or all of the distributed earnings will be taxable, and a 10% penalty also may apply.