529 plan tax rules: what is tax-free and what is not
Money in a 529 plan grows without federal tax, and comes out tax-free when it pays for qualified education. The details decide whether a withdrawal stays tax-free, and state rules can add a deduction on the way in or a tax on the way out.
General information, not tax advice. This guide explains how federal and state rules generally work. Your situation may differ; check the official source linked below or ask a tax professional before acting.
The basic deal
- Contributions are made with after-tax money: no federal deduction, but many states give one.
- Growth is not taxed while it stays in the plan.
- Qualified withdrawals are free of federal income tax, and usually of state tax.
- Nonqualified withdrawals make the earnings part taxable, usually plus a 10% additional tax.
What counts as a qualified expense
| Expense | Federal rule |
|---|---|
| College, graduate and eligible trade school costs | Tuition, fees, books, supplies, required equipment, computers and internet access; room and board for students enrolled at least half-time (up to the school's cost-of-attendance allowance) |
| K-12 (public, private or religious school) | Up to $20,000 per beneficiary per year from all 529s for distributions after 2025 ($10,000 before). Tuition, plus curriculum materials, books, tutoring, standardized and AP test fees and dual-enrollment fees for distributions after July 4, 2025 |
| Postsecondary credentials | Tuition, fees, books and required equipment for recognized credential programs, plus testing and continuing-education costs to keep a credential, for distributions after July 4, 2025 |
| Registered apprenticeships | Fees, books, supplies and required equipment |
| Student loan repayment | Up to $10,000 lifetime per borrower (the beneficiary or a sibling) |
| Rollover to the beneficiary's Roth IRA | Up to $35,000 lifetime; the 529 must be open 15+ years; recent 5 years of contributions excluded; counts toward the annual Roth IRA limit |
Summary of IRS Publication 970 and Tax Topic 313. States can treat K-12, loan repayment and Roth rollovers differently for state tax.
Form 1099-Q and reporting
In any year you take money out, the plan sends Form 1099-Q to the account owner or the beneficiary (whoever received the payment). Box 1 is the gross distribution, box 2 the earnings and box 3 the basis (your contributions). If qualified expenses for the year are at least as large as the distribution, nothing is taxable. If not, the taxable share of the earnings is figured with the worksheet in Publication 970.
Timing matters: match withdrawals to expenses paid in the same calendar year. A January tuition bill paid from a December withdrawal can create a mismatch.
Coordinating with education credits
You cannot use the same dollars of expenses for a tax-free 529 withdrawal and for the American Opportunity or Lifetime Learning credit. Because the American Opportunity credit is worth up to $2,500 on the first $4,000 of expenses, many families pay that amount from other savings and use the 529 for the rest.
Gift tax and superfunding
A 529 contribution is a gift to the beneficiary. For 2026 the annual gift tax exclusion is $19,000 per recipient ($38,000 for a married couple who split gifts). A special election lets you contribute up to five years of exclusions at once and spread it over five years on Form 709. Gifts above the exclusion use up lifetime exemption rather than creating tax for most people.
State tax deductions and recapture
More than 30 states give a deduction or credit for 529 contributions; most limit it to the state's own plan, and the amounts vary widely. If you later take a nonqualified withdrawal, roll the money to another state's plan, or use it for an expense your state does not recognize (some states do not accept K-12 tuition or Roth rollovers), the state may add the earlier deduction back to income. YourBestSavings keeps a 529 tax deduction by state table and ranks the best 529 plans state by state.
Changing the beneficiary
You can change the beneficiary to another member of the family (siblings, cousins, parents and others defined in Publication 970) without tax. Leftover money does not have to be withdrawn when the student finishes school.
Frequently asked questions
Are 529 contributions tax-deductible?
Not on your federal return. Many states give a deduction or credit for contributions, usually only to the state’s own plan; a handful give it for any state’s plan. See the state-by-state table on YourBestSavings.
How much can a 529 pay for K-12 tuition tax-free?
Up to $20,000 per beneficiary per year for distributions after 2025 (it was $10,000 before), counting all of the beneficiary’s 529 accounts. For distributions after July 4, 2025, qualifying K-12 expenses include tuition plus curriculum materials, books, tutoring, standardized test fees and dual-enrollment fees. Some states do not follow the federal K-12 rules for state tax.
What happens if I withdraw 529 money for something else?
The earnings part of a nonqualified withdrawal is taxable income to whoever receives it and usually owes an additional 10% tax. Contributions come back tax-free. The 10% does not apply in some cases, such as when the beneficiary receives a tax-free scholarship (up to the scholarship amount), dies, becomes disabled or attends a U.S. military academy. Your state may also recapture deductions you took.
Can I roll a 529 into a Roth IRA?
Yes, within limits: up to $35,000 over the beneficiary’s lifetime, from a 529 open at least 15 years, excluding contributions (and their earnings) made in the last 5 years. Each year’s rollover counts toward the beneficiary’s Roth IRA contribution limit and the beneficiary needs earned income.
Do I get a Form 1099-Q?
The plan sends Form 1099-Q for any year with a distribution. It shows the gross distribution, the earnings and the basis. If all of it paid qualified expenses, you generally do not report it as income, but keep receipts.
Can I use the same expenses for a 529 withdrawal and the American Opportunity credit?
No. Expenses used to claim the American Opportunity or Lifetime Learning credit cannot also be counted as qualified 529 expenses. Families often pay a few thousand dollars of tuition from other funds to claim the credit and use the 529 for the rest.
Official sources
- IRS Publication 970, Tax Benefits for Education
- IRS Tax Topic 313, Qualified tuition programs
- IRS: Frequently asked questions on gift taxes
Related guides
- How savings and CD interest is taxed — Form 1099-INT, when interest counts as income, accrued interest on multi-year CDs, and the early-withdrawal penalty deduction.
- Treasury and I bond interest: state tax exemption — Why T-bill, note and I bond interest is free of state income tax while bank interest usually is not, with a state-by-state table.
- HSA tax rules — Contribution limits, the triple tax advantage, Form 8889, and the states (California and New Jersey) that tax HSAs.
- Bank bonuses and card rewards: what is taxable — Bank account bonuses (1099-INT or 1099-MISC) versus credit card rewards earned by spending (treated as rebates).
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