529 Withdrawal Penalties in Every State

When you’re a parent or other adult saving for a child’s educational expenses, a 529 plan can be a terrific option to maximize your savings. Also called “qualified tuition plans” (QTP), there are two main types of 529 plans offered, with options in every state plus the District of Columbia.

You might opt for a prepaid tuition plan or an education savings plan. These both have their benefits, but the best choice for you will depend on a few circumstances and how much flexibility you need.

General explanation of 529 plans

529 plans, named for Section 529 of the Internal Revenue Code, are savings programs for education that offer major tax advantages.

You’ll generally choose one of two options among 529 plans:

• Prepaid tuition plan
• Education savings plan

A prepaid tuition plan lets you save money that’s earmarked for tuition at a participating college or university. Basically, you buy credits to use at the school, locking in today’s prices, which can be a significant discount on future tuition rates.

Education savings plans are more flexible. Funds in these accounts can be used for tuition and expenses at most U.S. colleges and universities, and very few of them have state residency requirements. Plus, these plans may be used to fund up to $10,000 per student at a K-12 school.

Penalties on withdrawals for nonqualified expenses

A 529 non-qualified withdrawal is one that uses funds not for approved educational expenses. While sometimes this is unavoidable, be aware of the tax penalties attached to distributions not for tuition or other qualified costs.

Let’s discuss the most common penalties you can expect, so you can take steps to avoid these additional costs and make the most of your educational savings.

The main issue is that 529 plans provide the biggest benefit only when the funds are used for qualified education expenses. Whether you go with a prepaid tuition plan or education savings plan, following that plan’s requirements for what’s considered “qualified” expenses is essential.

Qualified expenses for 529 funds

• Tuition and fees
• Textbooks
• Supplies and equipment
• Computer software and Internet access
• Apprenticeship program expenses
• Certain on-campus room and board costs
• Up to $10,000 per year for K-12 tuition
• Qualified education loan repayments

Non-qualified expenses for 529 funds

• Transportation
• Health insurance
• College entrance exam fees or test preparation fees
• Extracurricular expenses
• Expenses used to access federal tax credits, like the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC)

For most 529 plans, the penalty for using withdrawn funds for non-qualified educational expenses is as follows:

• Pay your regular state and federal income tax on the earnings in the 529 account
• Pay another 10% federal tax penalty on top of that

The funds in a 529 plan still belong to the beneficiary, but their value decreases quite a bit if you don’t use them as intended.

You’ll pay tax penalties on unused 529 funds, so it’s good not to over-fund a 529 plan if you can avoid it. There are ways to sidestep that problem; for example, you can transfer 529 funds to a different beneficiary such as another child in the family without incurring a tax penalty.

Exceptions to 529 withdrawal penalties

There are certain life situations that enable an account holder to avoid the 10% tax penalty. However, earnings on the 529 funds are still subject to income tax even in these cases.

• If the beneficiary dies or becomes disabled
• If the beneficiary receives a tax-free scholarship
• If the beneficiary is in a qualifying employer program that offers assistance with school expenses
• If the beneficiary attends a U.S. military academy
• You used the qualified education expenses to get the AOTC or the LLTC.

If you’re unable to use all of the 529 funds for the designated beneficiary, the IRS permits one rollover to a different beneficiary per 12-month period. As long as you don’t exceed one 529 rollover per 12 months, you won’t have to pay taxes on the earnings. This can either be a direct transfer or completed within 60 days of a distribution from the account.

State-specific 529 withdrawal penalties

State	Program name	Withdrawal penalty
Alabama	CollegeCounts 529 Fund	Earnings on a non-qualified withdrawal results in federal and state taxes plus a 10% federal penalty.
Alaska	Alaska 529	You incur federal income tax and a 10% federal tax penalty for non-qualified withdrawals.
Arizona	College Savings Bank 529 Savings Plan	Earnings on non-qualified withdrawals are taxed at the federal and state levels, plus a 10% federal tax penalty.
Arkansas	iShares 529 Plan	Non-qualified use results in regular federal tax rate plus 10% additional federal tax.
California	ScholarShare 529	Non-qualified withdrawals result in federal and state income tax plus 10% penalty.  Withdrawals for K-12 tuition, student loan payments, or apprenticeships are subject to state income tax plus a 2.5% California tax.
Colorado	CollegeInvest Direct Portfolio	Federal and state income tax is assessed on nonqualified withdrawals, plus 10% federal penalty.
Connecticut	Connecticut Higher Education Trust (CHET)	Earnings on non-qualified withdrawals are subject to federal and state income tax plus a 10% federal tax penalty.
Delaware	Delaware College Investment Plan	Earnings on non-qualified withdrawals are subject to federal and state income tax plus a 10% federal tax penalty.
District of Columbia	DC College Savings Plan	Earnings on non-qualified distributions require federal income tax and 10% federal tax penalty plus state/local income tax. DC tax deductions are subject to recapture.
Florida	Florida 529 Plan	Earnings on non-qualified distributions require federal and state income tax and 10% federal tax penalty.
Georgia	Path2College 529 Plan	Non-qualified withdrawals result in federal and state income tax plus the 10% federal penalty.
Hawaii	HI529-Hawaii’s College Savings Program	Earnings on nonqualified withdrawals incur a regular tax rate plus 10%, and state/local taxes.
Idaho	IDeal – Idaho College Savings Program	Nonqualified distributions and transfers to other states are subject to tax. Earnings on nonqualified withdrawals: regular tax rate plus 10% penalty.
Illinois	Bright Start College Savings Program Direct	Earnings used for a non-qualified 529 withdrawal trigger federal and state income tax plus a 10% federal penalty, plus Illinois may recapture previous tax deduction benefits.
Indiana	CollegeChoice 529 Direct Savings Plan	Earnings on non-qualified distributions result in federal and state income tax plus a 10% federal tax penalty.
Iowa	College Savings Iowa 529	Non-qualified withdrawals incur federal income tax on earnings plus 10%, and state and local taxes may apply.
Kansas	Learning Quest	Non-qualified 529 withdrawals will result in federal income tax, a 10% federal tax penalty, and applicable state and local taxes.
Kentucky	KY Saves 529	If you make 529 withdrawals for non-qualified educational expenses, you’ll pay federal income tax on earnings plus a 10% federal tax penalty and state and local income tax.
Louisiana	Student Tuition and Revenue Trust (START) Saving Program	If you take a refund of unused 529 funds for non-qualified expenses, earnings are subject to federal and state tax plus 10% federal tax penalty.
Maine	NextGen 529 Direct Series	Earnings in non-qualified disbursements are subject to federal and state tax plus the 10% federal tax penalty.
Maryland	Maryland College Investment Plan	Distributions not used for qualified educational expenses incur federal and state taxes plus a 10% federal tax penalty.
Massachusetts	The U. Fund College Investing Plan	Non-qualified 529 withdrawals mean earnings are subject to federal and state income tax, plus a 10% federal tax penalty.
Michigan	Michigan Education Savings Program	You pay federal and state income tax plus a 10% federal tax penalty on 529 plan withdrawals not for education.
Minnesota	Minnesota College Savings Plan	Making non-qualified withdrawals results in earnings being taxable, plus another 10% federal tax penalty.
Mississippi	Mississippi Affordable College Savings (MACS)	Withdrawals for nonqualified expenses are taxable through the state.
Missouri	MOST – Missouri’s College Savings Plan	Withdrawals for non-qualified educational expenses are subject to regular income tax rate plus 10%.
Montana	Achieve Montana	Earnings on non-qualified withdrawals result in federal income tax plus 10% penalty.
Nebraska	Nebraska Educational Savings Trust “NEST” Direct College Savings Plan	K-12 tuition, apprenticeship expenses and qualified education loan payments don’t count as Nebraska qualified expenses, so earnings are taxed by the state and previous Nebraska state income tax deductions are subject to recapture.
Nevada	Vanguard 529 College Savings Plan	Federal taxes plus a 10% federal tax penalty apply for earnings on non-qualified distributions.
New Hampshire	UNIQUE College Investing Plan	Earnings on non-qualified withdrawals are taxable at regular rates plus a 10% federal tax penalty.
New Jersey	NUBEST 529 College Savings Plan	Withdrawals for non-qualified expenses are subject to federal income tax, a 10% penalty, and state income tax.
New Mexico	The Education Plan	Earnings on non-qualified 529 withdrawals are taxable at federal and state levels, plus there’s a 10% federal tax penalty.
New York	New York’s 529 College Savings Program Direct Plan	529 Plan withdrawals not for education trigger federal taxes plus a 10% federal tax penalty, plus state and local income taxes. Rollovers also are subject to NY state tax on earnings.
North Carolina	North Carolina’s National College Savings Program	A 529 Non-qualified withdrawal causes a 10% penalty and federal and state income taxes, plus a $50 processing fee.
North Dakota	College SAVE	The 529 withdrawal penalty for non-qualified educational expenses is regular federal income taxes and a 10% penalty in addition to state and local taxes.
Ohio	CollegeAdvantage Direct 529 Savings Plan	Earnings are taxable at federal and state levels, plus a 10% federal tax penalty is assessed for non-qualified disbursements.
Oklahoma	Oklahoma College Savings Plan	529 plan withdrawals not used for education will be subject to federal and state income tax plus a 10% federal tax penalty.
Oregon	Oregon College Savings Plan	529 non-qualified withdrawals will trigger federal income tax and a 10% federal tax penalty.
Pennsylvania	Pennsylvania 529 Investment Plan	Withdrawals not used for qualified educational expenses are subject to federal and state tax plus a 10% federal tax penalty.
Rhode Island	CollegeBound 529	Earnings on non-qualified withdrawals are subject to federal and state tax plus a 10% federal tax penalty.
South Carolina	Future Scholar 529 College Savings Plan	Earnings on non-qualified withdrawals will incur taxes plus a 10% federal tax penalty.
South Dakota	CollegeAccess 529	There is no state income tax, but earnings on non-qualified withdrawals are subject to federal tax and a 10% tax penalty.
Tennessee	TNStars College Savings 529 Program	Earnings you withdraw not for qualified educational expenses are subject to federal tax plus a 10% federal tax penalty.
Texas	Texas College Savings Plan	529 plan withdrawals not used for education will subject you to federal and state income tax and a 10% federal tax penalty.
Utah	My529	Earnings for a non-qualified 529 withdrawal result in federal tax plus 10% and for Utah residents, state income tax.
Vermont	Vermont Higher Education Investment Plan	Earnings on non-qualified 529 withdrawals are taxable and add a 10% federal tax penalty.
Virginia	Invest529	Earnings on 529 plan withdrawals not used for education are taxable at both the state and federal levels, in addition to a 10% federal tax penalty.
Washington	DreamAhead College Investment Plan	The 529 withdrawal penalty for non-qualified distributions is that earnings are taxable at federal and state level, plus 10% federal penalty.
West Virginia	SMART 529 WV Direct	If you take distributions for non-qualified expenses, you’ll pay federal and state tax plus a 10% federal penalty.
Wisconsin	Edvest College Savings Plan	Withdrawal of unused 529 funds is state and federally taxable, but without the 10% federal penalty. Non-qualified withdrawals incur federal and state income tax plus an extra 10% federal tax.
Wyoming	Wyoming has no state 529 plan.	N/A

Ways to minimize penalties on unused 529 funds

If there’s no way for the original beneficiary to use 529 funds for qualified educational expenses, there are several options for avoiding the 529 withdrawal penalties and taxes:

• Roll over 529 funds to a different beneficiary within the family
• Use funds for the beneficiary’s graduate school education
• Transfer unused 529 funds to yourself to pay for higher education
• Transfer the funds to save for a future grandchild

Bottom line

Opening a 529 plan is a great option for families who want to save for college or other educational expenses. They offer the chance for your savings to grow tax-free, leaving more money available to pay for other costs while in school.

However, read the fine print and be sure to select the optimum plan for your upcoming student. For instance, if residency in-state is uncertain, don’t get locked into a state-specific prepaid tuition plan. Or if you don’t have sufficient reason to believe the beneficiary will use the 529 funds for appropriate educational expenses, you might find a different, more flexible route.

Avoiding paying unnecessary taxes on your 529 plan isn’t all that difficult. With most educational savings plans, you simply need to use the funds for tuition and other required school expenses. Just be aware of the state’s 529 guidelines to maximize your 529 savings, and help your beneficiary take out fewer student loans.