You can take money out of a 529, but the reason for the distribution matters
Yes. A 529 plan can make a distribution, including a distribution that is not used for education. The federal tax result depends on the portion of the payment that represents earnings and on the beneficiary’s adjusted qualified education expenses for that tax year. The plan statement and Form 1099-Q are starting records, not the final tax calculation.
The IRS says no federal tax is due on a qualified tuition program distribution to the extent it does not exceed adjusted qualified education expenses. If a distribution exceeds those expenses, part of the earnings can be taxable. That is why the withdrawal should be matched to the year’s actual education records before money is requested or withdrawn.
If the student does not attend college, identify the available path before cashing out
An unused balance does not automatically mean that a cash withdrawal is the only available step. Current federal rules can allow a beneficiary change to an eligible family member, and the plan may have other administrative options. The plan provider should confirm what its current process permits and what records it needs for a change or transfer.
For certain distributions after 2023, a long-held 529 may also support a direct trustee-to-trustee rollover to a Roth IRA for the same beneficiary when statutory conditions are met. The IRS describes conditions including a 15-year account period and limits connected to contributions made more than five years before the distribution. This is a rule-bound transaction, not a general cash-out option, so get current plan and tax information before treating it as available.
A nonqualified withdrawal can create income tax and an additional tax on earnings
A cash distribution used for a nonqualified purpose can make the earnings portion taxable. The IRS says a taxable 529 distribution generally also carries a 10% additional tax on the amount included in income, subject to stated exceptions. The additional tax is not calculated on the entire account balance merely because money is withdrawn.
Scholarships, veterans’ benefits, employer educational assistance, certain other tax-free educational assistance, disability, death, military-academy attendance, and the use of expenses for certain education credits can change the additional-tax question in specified ways. They do not make the account’s full balance automatically tax-free. Determine the actual expense, assistance, beneficiary, and distribution amount before completing the tax treatment.
Coordinate the distribution with the same tax year’s education records
A 529 payment is an annual matching exercise. Collect tuition and fee bills, housing records when relevant, scholarship and grant information, receipts, and the plan’s distribution confirmation for the same tax year. The same expense generally cannot be used both to support a tax-free 529 distribution and another federal education tax benefit.
State income-tax treatment and state-plan rules can differ from the federal rules. Ask the plan administrator for its current withdrawal and beneficiary-change procedures, then review the federal and state tax records before submitting a large nonqualified distribution.
When a 529 review is useful
If a beneficiary will not use all of a 529 balance, you are considering a cash withdrawal, or you need to coordinate education expenses with a distribution, we can review the plan record, the year’s expenses and assistance, and the tax questions that should be resolved before the transaction is submitted.