Top 5 Things to Consider Before Withdrawing Money from a 529 for Non-Qualified Purposes
529 plans are one of the smartest ways to invest and save for higher education; however, many of the benefits of a 529 plan are lessened if you withdraw savings for non-qualified purposes. Here are 5 things to consider before withdrawing money from a 529 for non-qualified purposes.
1. One of the benefits of a 529 plan is that withdrawals can be made tax free if used for qualified education expenses! When withdrawals are used for other, non-qualified purposes, the earnings portion of the withdrawal is subject to federal income taxes and any applicable state income tax, as well as an additional 10% penalty. New Mexico residents are subject to the recapture of all previous New Mexico tax deductions taken for contributions to an account used for non-qualified expenses. Note that your initial contribution portion is not subject to tax or penalty if it was made with after-tax dollars.
2. A non-qualified withdrawal can incur a 10% penalty on earnings. There are a few exceptions to this rule. A penalty may be waived under specific circumstances, such as if a beneficiary dies or becomes disabled, a beneficiary receives a tax-free scholarship, or if they attend a U.S. Military Academy. Contact your 529 plan if you suspect these exemptions apply to you.
3. Tuition and textbooks aren't the only educational expenses one may face. Many other expenses during education count as "qualified expenses." This includes room and board, computer equipment and technology, many international programs, and more. Qualified expenses will not incur tax or a withdrawal penalty.
4. There is no penalty for leaving leftover funds in a 529 plan after a student graduates or leaves college, and funds do not expire. This means that funds not spent can be used decades later. Leftover funds in a 529 plan can make it financially possible for a benefactor to go back to school to change or advance their career at any stage of their life. A recent survey by the Bureau of Labor Statistics found that the average Baby Boomer held 12.4 jobs over the course of their working life, and surveys indicate that about one-third of college graduates will change careers at least once in their lifetime.
5. Leftover or unused 529 funds can also be rolled into another beneficiary's account. This can be an option if you have multiple children or you would like the funds to be available for future grandchildren or loved ones. The longevity of a 529 plan also means that your savings can benefit from growth over time.
Frequently Asked Questions
A 529 plan is a tax-advantaged investment account that is designed to grow savings for future education expenses for a specified beneficiary. 529 plans offer unique benefits and features that make them an appealing strategy for education related saving.
A 529 plan can be used for “qualified educational expenses.” For federal tax purposes, qualified educational expenses include:
- Tuition and fees at accredited higher education institutions
- Books
- Supplies and equipment
- Room and board for beneficiaries attending on at least a half-time basis.
- Computer technology, equipment, and internet access
- Up to $10,000 a year for K-12 tuition and expenses (Limit increase to $20,000 in 2026)
- Expenses for educational special needs services
- Transfers to an ABLE account for the beneficiary (transfer subject to annual limit)
- Apprenticeship expenses
- Up to $10,000 for student loan repayment
- Credentialing expenses and certification programs
- Roth IRA rollover for the beneficiary
If you're not sure if an expense is considered "qualified," we recommend consulting with a tax professional or advisor. Unqualified expenses will be treated like ordinary income: state and federal taxes will apply, with a 10% federal penalty for withdrawals from your 529 plan used to pay for them.
New Mexico residents can deduct contributions to The Education Plan from their state taxable income each year. This includes contributions made to an account that you are not the account owner of.
You cannot deduct contributions from federal income taxes.
Any person at least 18 years old with a valid Social Security Number (SSN) or Tax Identification Number (TIN) can open a 529 account. The account holder chooses the investment options, designates a beneficiary, and requests the distribution of funds.
The cost of college continues to rise, including tuition, housing, food and supplies, so it’s important to begin saving as soon as possible. You can learn more about how much a typical college education costs on our Cost of College page. It’s never too early or too late to start.
The Education Plan offers a variety of investment options to fit you and your family’s needs, risk tolerance and goals. You can see all of the available investment portfolios on the investments page.
Yes, you can use up to $20,000* a year to cover tuition and expenses for K-12 education.
Qualified K-12 expenses include:
- Tuition (public, private, and religious)
- Curriculum materials, books (including digital/online) and instructional materials
- Tutoring and instructional classes**
- Fees for a nationally standardized norm-referenced achievement test, an advanced placement examination, or any examinations related to college or university admission
- Dual enrollment program fees
Educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies
*Starting in tax year 2026. The annual limit is $10,000 in tax year 2025 and permitted for tuition only.
**Tuition for tutoring or educational classes outside of the home, including at a tutoring facility, but only if the tutor or instructor is not related to the student and—
(i) is licensed as a teacher in any State,
(ii) has taught at an eligible educational institution,
or (iii) is a subject matter expert in the relevant subject.
You can open an account with The Education Plan online or by mailing in the enrollment form. In order to open an account, you will need the following information:
- Your social security number or TIN
- Your address
- Your bank account information (in order to fund the account)
- The beneficiary’s social security number or TIN
- The beneficiary’s birthday
-The beneficiary’s address
