Taking Money Out of Your 529 College Savings Plan

You've been saving money for your child's college education, and now it's time to use it. Here's what you need to know about withdrawing money from your 529 college savings plan.

Good News About Taxes

When you put money into a 529 plan, you didn't get a tax break for it. But the good news is that when you take the money out, you won't have to pay taxes on it — as long as you use it for approved college expenses.

What Counts as Approved Expenses?

You can use 529 money tax-free for:

• Tuition and fees

• Required books, supplies, and equipment

• Computers and internet access

• Software (but not games)

• Student loan payments (up to $10,000 total per student)

• K-12 school expenses (for federal taxes — but California doesn't allow this)

How to Stay Out of Tax Trouble

Here's the simple way to make sure you don't owe taxes:

• Keep track of how much you spend on college expenses during the year

• Don't count expenses that scholarships or grants already paid for

• At the end of December, add up all your out-of-pocket college expenses

• As long as you spent more than you withdrew from your 529 plan, you're fine

You don't need to keep the 529 money in a separate bank account — just keep good records of your expenses.

Bonus: You Might Get Additional Tax Benefits

If you spent more on college than you withdrew from your 529 plan, that extra amount might qualify you for education tax deductions or credits.

Using IRA Money for College

If you need to take money from a traditional IRA for college expenses, you won't have to pay the usual 10% penalty (even if you're under 59½). However, you will still owe regular income tax on the withdrawal if you got a tax deduction when you originally put the money in.

The IRA money can be used penalty-free for:

• Tuition and fees

• Books and materials

• Computers and related equipment

Need More Help?

California's 529 plan website has detailed information if you want to learn more. And if you have questions or need help with your taxes, consider working with an experienced CPA.