Am I Locking Up My Money? 529 Withdrawal Rules, Explained

If you're concerned about "locking up" your money in a 529 College Savings Plan, you've come to the right place. When considering a withdrawal from your 529, you just need to remember three things.

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Rule 1: You can always withdraw your original contribution (the "principal") without additional taxes or penalties. Of course, if you withdraw that money, it won't be growing for you - but you can rest easy knowing that your original contribution is not "locked up."

Rule 2: The "earnings" portion is subject to a 10% penalty for non-qualifying expenses, but it's still more flexible than you might think:

  • You can spend the money on much more than tuition: Tuition & fees, room & board, books, computer technology & related equipment, and special education expenses are all qualified expenses.
  • Eligible institutions include any higher education institution qualifying for federal financial aid, which includes out-of-state colleges, graduate schools, and even many institutions abroad. Here's the full list.
  • You can change the beneficiary to another family member. This is great if you have money left over after your first child, or if your child decides not to go college. For more information on changing the beneficiary, click here.
  • If your child earns a scholarship, you can also withdraw the amount of the scholarship without penalty. You will, however, need to pay taxes on the earnings portion of that withdrawal, so it's even smarter to spend this money on the qualifying expenses listed above.

Rule 3: When you make a withdrawal, you have to report it to the IRS. It's called a Form 1099-Q, and this is how you tell the IRS whether it was spent on a qualified higher education expense. You can also have the withdrawal paid directly to the higher education institution, to make things easier.

That's it! Your money is always your money – and now you know everything you need to know about how to access from a 529 College Savings Plan.

Next Up: Who Can Use a 529 College Savings Plan?