Non-Qualifying Withdrawal from a 529 Education Account

BSbenn48 Member Posts: 2 Newcomer

We have money invested in 529 Educational Accounts that probably will never be used for educational purposes. If we make a non-qualifying withdrawal what are the tax implications and are there penalties involved.


  • MatthewD
    MatthewD FreeTaxUSA Team Posts: 247

    Hi BSbenn48,

    Contributions to a 529 education savings plan allows you to make non-deductible contributions, which can grow tax free. That is for federal purposes. Some states allow you to take a deduction for each account up to a certain amount, even if the account is not for a dependent. Check your state instructions for 529 deductions.

    Since 529 plans are not a deduction for federal tax purposes, there isn't a penalty for withdrawing the basis or original investment. On your federal return however, you can pay taxes (at your marginal tax rate) and a 10% penalty on the interest earnings on non-qualifying distributions.

    For states that allow a deduction, you would pay taxes at your state tax rate on any non-qualifying distributions.

    See the "Tuition Program Distributions (Form 1099-Q)" section of the software, under the Uncommon Income section to enter the form 1099-Q you will get for any 529 distributions. Enter your information and answer the questions. The software will make the calculations for you and place them on the right forms.

  • BSbenn48
    BSbenn48 Member Posts: 2 Newcomer

    Matthew: Thank you for the answer. That was very helpful.