Planning to make a 529 withdrawal? Learn how to steer clear of common mistakes

If you'll soon be facing those long-anticipated education expenses, don't worry. Taking money out of your 529 plan account won't be difficult. Simply follow these steps.

To process a request online, log on to your account, choose Go to my 529 plan account, and then select Withdrawal. Or you can mail us a a completed Withdrawal Request Form.

And—before you request that withdrawal—here are some tips to help you avoid some common mistakes.

Withdraw only for qualified expenses

Any earnings you withdraw are free from federal income taxes and the 10% penalty only if the money is used for qualified expenses.*

Qualified expenses include tuition, fees, books, equipment (such as computers, internet access, and computer software), certain room and board expenses, and expenses for students with special needs.**

For more information, refer to IRS Publication 970, Tax Benefits for Education.

Take out the right amount

While this may seem obvious, it's important because if you withdraw more than you need, that excess must be reported as taxable income by either you or the beneficiary. When you're calculating your withdrawal amount, don't forget to:

  • Subtract any scholarship or grant money from the amount you're planning to withdraw.
  • Deduct any federal tax credits, like the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit.

Map out a withdrawal plan

Think about spreading out your withdrawals. If you do so over the 4 years of college, you'll be less likely to withdraw more than your yearly qualified expenses.

And, if you can, keep making contributions. Even if the money won't be in the account a long time, you'll pay less income tax. You also won't miss out if your state offers a tax deduction or credit.

Don't wait too long

Remember that electronic bank transfers from your 529 plan typically take 3‒5 business days, even transfers paid directly to your beneficiary’s school, so make your withdrawal request in time for you to meet your payment deadline.

You could also pay the school invoice when you receive it, then take the distribution from your 529 account as a reimbursement. If you want to receive a check, allow at least 10 business days. Keep in mind, if you have not added banking instructions to your account, give yourself additional time for your bank information to be verified. As long as you keep the documentation needed for IRS purposes, this can help reduce the anxiety of tight timelines.

Ready to request a withdrawal?

Refer to these instructions which explain how to do so online, by phone, or by form.

*Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.

**Qualified expenses also include up to $10,000 annually for expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school (K-12 Tuition). However, not all states allow for tax-free withdrawals on the state level. Under New York State law, distributions for K‒12 Tuition are considered nonqualified withdrawals and may be subject to recapture of any New York State tax benefits that have accrued on contributions. NY529 account owners in other states should seek guidance from the state in which they pay taxes.