Can You Get Money Out of Your 529?

A 529 plan isn’t complicated. Funding it is easy, and so is watching it grow.

But using it without tripping a tax penalty or sabotaging your student’s financial aid? That part requires more precision than many of us realize.

For years, the 529 has flown under the radar. No wild headlines, no policy drama. Just a clean and tax-efficient way to fund college.

But in light of the recent surge in policy changes, rising tuition, and the IRS’s scrutiny of mismatches, I felt the need to write this article.

If you’re part of a high-income household, particularly juggling multiple college-bound kids, scholarships, and potential tax credits, getting money out of your 529 plan means getting ahead of the ambiguity.

The path you choose, whether funds go to your student, yourself, or straight to the college, can have ripple effects for taxes, audits, and next year’s aid package.

In this article, we’ll talk about how you can use your 529 plan the right way: tax-smart, penalty-free, and with your financial strategy intact.

Read about 11 Ways to Invest in Your Child’s Future

What a 529 Plan Actually Does

A 529 plan, named after Section 529 of the Internal Revenue Code, is a tax-advantaged investment vehicle intended to fund education.

As of mid-2024, Americans had saved a total of $508 billion across 16.8 million accounts.

There is no federal tax deduction for contributions, but investment gains grow tax-deferred, and withdrawals are entirely tax-free if used for Qualified Higher Education Expenses (QHEEs).

The IRS defines “qualified expenses” more broadly than most assume, but not everything your student spends money on will pass muster.

Can You Get Money Out of A 529?

Yes, but how you do it matters.

Distributions can be sent to one of three recipients:

• The student, who is the plan’s beneficiary.
• The account owner, typically a parent or guardian.
• The educational institute/ the Bursar’s office.

Each of these choices impacts your tax reporting, audit risk, and possibly even your child’s financial aid eligibility.

What Counts as a Qualified Expense?

Before you take out a dime, it helps to know which expenses are qualified.

Here’s a breakdown:

Note: “COA’ refers to the school’s published Cost of Attendance.

Option 1: Send the Money to the Student

This may feel risky, but it’s often the most IRS-aligned method, because it’s the student paying their own qualified expenses.

When you send a 529 distribution to your student (the plan’s beneficiary), the IRS Form 1099-Q is issued in their name and Social Security number.

That aligns with the 1098-T issued by their college, which also lists the student’s SSN.

This clean match makes it easier for the IRS to connect the dots between the distribution and the QHEE. That ease translates into less paperwork and a lower risk of audit.

If you accidentally withdraw more than the student’s qualified expenses for the year, the tax liability and 10% penalty (on the earnings portion only) fall to the student, not the parent. And since students are often in a much lower tax bracket than their high-earning parents, the financial hit may be relatively minor.

Understandably, some parents are hesitant to put that kind of financial responsibility into their child’s hands.

There’s the fear they’ll spend it on something non-qualified or fail to keep good records. But with a little structure and perhaps a joint review of what qualifies and what doesn’t, it can be an ideal time for them to start learning the ropes of personal finance.

College is a natural pivot point where kids begin handling bills, bank accounts, and real-world money decisions. Helping them take ownership of their educational expenses (even with your oversight) can serve as a valuable hands-on lesson in financial responsibility.

And if they mess up? That’s okay, too. A small tax hiccup in a low-bracket year isn’t the end of the world, and in many cases, it’s the kind of mistake they’ll only make once. Better they learn it now, with your guidance, than stumble through a much costlier version of the same lesson later in adulthood.

Option 2: Send the Money to Yourself

You can legally have the 529 distribution made payable to yourself, as the account owner.

This approach is common among parents who want to maintain control of the funds and ensure that tuition and related expenses are paid promptly and correctly.

But while this approach gives you direct oversight, it also introduces unnecessary complexity, particularly for physicians who are already stretched thin

When you send the distribution to yourself, the IRS Form 1099-Q is issued in your name and SSN. Meanwhile, the 1098-T from the college is issued in your student’s name.

That disconnect creates a reporting mismatch. The IRS sees tax-free income attributed to you but doesn’t see corresponding education expenses on your return.

And that’s often enough to trigger an automated CP2000 notice asking you to explain the discrepancy.

While this doesn’t necessarily mean an audit, it does mean added paperwork, and the burden of proof shifts to you.

To avoid problems, you’ll need to manually document that the funds were used for QHEEs in the same calendar year. That includes saving tuition invoices, payment confirmations, bank statements, and receipts, essentially building your paper trail in case the IRS comes calling.

And that’s where time becomes a factor. If you’re a physician (or anyone else juggling complex professional and family obligations), you may not want to take on the extra admin.

Between EMR notes, call schedules, and CME requirements, keeping an annotated folder of qualified education receipts might not rank high on your list. But it may become necessary if you choose this route.

Some families opt for this method because it allows them to hold back funds in case a scholarship or credit comes through late. Others simply feel more comfortable managing the money themselves.

Either way, just know that convenience on the front end often translates into paperwork on the back.

If you prefer to minimize the chance of IRS questions and streamline your tax reporting, another distribution path may serve you better.

Option 3: Pay the College Directly

On its face, this seems like the most elegant solution.

Many families prefer direct payments from a 529 plan to the educational institution because it removes any ambiguity about where the money went.

The payment goes straight to the Bursar’s office, tuition gets posted to the student’s accounts, and the funds are clearly earmarked for education.

As financial planner Melissa Sotudeh puts it, “You want to make sure your paper trail is as clean as possible. Paying the school directly is just super clean.”

In this way, you’re minimizing the chance of misusing the funds and creating a paper trail that looks good in an audit.

Again, for busy professionals, especially those managing multiple 529s or paying large tuition bills each semester, this method offers peace of mind.

The 1099-Q -Q still goes to the student, and the school issues its 1098-T, so from a tax perspective, it’s all very straightforward.

But there’s a catch.

If your child is receiving need-based financial aid, direct payments from a 529 plan, even if used for legitimate expenses, can be misclassified by the college as untaxed student income.

This is especially likely when the 529 account owner is someone other than the parent, such as a grandparent. Under the FAFSA formula, such income is treated far more punitively than parent assets. Up to 50% of the amount received can count against next year’s aid eligibility.

Now, if you’re a high-income physician or part of a dual-physician household, it’s easy to assume that need-based aid doesn’t apply to you, and in many cases, that’s true. Traditional FAFSA-based grants tend to phase out well before incomes hit the $200,000 mark.

But the picture isn’t always black and white.

Elite private universities and liberal arts colleges often use the CSS Profile, which takes a more nuanced view of your finances, factoring in non-retirement assets, family size, multiple children in college, and regional cost-of-living differences.

It’s not unusual for high-income families with more than one college-bound child to qualify for institutional need-based aid, especially if they’ve structured their assets efficiently.

So even if your FAFSA says you’re above the threshold, a poorly timed 529 distribution, particularly from a grandparent-owned account, can still affect your financial picture at certain schools.

That’s why it’s wise to check with the financial aid office before authorizing a direct transfer. Ask how the school treats incoming 529 funds, especially if the account is held by someone other than a parent. A brief email or phone call could help preserve thousands in institutional aid, or at least give you clarity on how to proceed.

If your student isn’t receiving aid, sending funds directly to the school can be the most seamless route. But for families navigating a more complex financial aid environment, particularly those with multiple children or applying to selective private colleges, the cleanest method on paper might come with hidden tradeoffs.

529 vs. UTMA: Which College Savings Plan Is Right for You? Click to find out.

Timing Rules and Tax Coordination

One of the most common yet easily avoidable 529 mistakes comes down to timing.

Withdrawals must be made in the same calendar year the expense was incurred, not simply the same academic year. That distinction matters. 

Spring semester bills often arrive in December, even though the term begins in January. If you wait until January to withdraw the funds, the IRS may flag the distribution as unrelated to the qualified expense.

That misalignment can trigger taxes and a 10% penalty on the earnings portion of your withdrawal, even if the funds were ultimately used for tuition.

To stay in the clear, match both the payment and the withdrawal to the same tax year. If the bill hits in December, don’t delay your 529 distribution until after New Year’s.

And if you receive the bill in January, avoid pulling from your 529 the prior December in anticipation. IRS reporting looks at calendar year behavior, not school year logic.

Note: If your student is starting college this fall, make sure their personal bank account is linked to their 529 now. Many plans require a 45-day verification period before distributions can be made to new external accounts. Waiting too long can jam up your timeline right when tuition is due.

American Opportunity Tax Credit (AOTC)

Even high-income households can sometimes qualify for the American Opportunity Tax Credit (AOTC), which is worth up to $2,500 per student, per year.

The credit phases out at a MAGI of $180,000 (married filing jointly), which means some physicians, particularly those working part-time, early in practice, or with significant deductions, may still be eligible.

The catch is, you can’t double-dip. If you pay tuition with 529 funds, you can’t also claim that same expense towards the AOTC.

To preserve your eligibility, you’ll need to pay at least $4,000 of tuition, books, or supplies with non-529 money. Then use the 529 for any remaining qualified costs.

This simple coordination strategy can help you reduce your tax bill without sacrificing the benefits of your education savings.

What to Do If You Withdraw Too Much

What happens if you miscalculate and withdraw too much?

It’s not fatal, but it can be expensive.

The earnings portion of any excess becomes taxable income, and you’ll owe a 10% penalty, unless you qualify for an exception. Those include situations where the student:

• Received a scholarship
• Attends a U.S. military academy
• Became disabled or passed away

Absent those exceptions, you can still avoid the penalty if you recontribute the excess within 60 days, per IRS guidelines.

So if you withdraw too much, act fast: either re-deposit the funds to the 529 or prepare to report the income and penalty on your next tax return.

Don’t Drain the Account in One Year

Some families assume they should spend down the 529 balance before turning to student loans. It is often recommended to spread distributions across all four years of college.

Why? Because federal student loan limits are annual, not cumulative. If you skip borrowing in Year 1 and need funds in Year 3, you may be forced to rely on costlier options like PLUS loans or private financing.

In this case, managing both cash flow and eligibility takes priority over eliminating debt as quickly as possible.

In case you missed it: 7 Ways For High Income Families To Pay For College

FAQs

Q: Do I need to match the exact tuition invoice amount with my 529 withdrawal?

No. You don’t need to match line-for-line as long as your total withdrawals for the calendar year do not exceed your total qualified education expenses for that same year. That includes room, board, books, and other qualified expenses, not just tuition.

Q: Can I use 529 funds for my child’s off-campus rent?

Yes, as long as your child is enrolled at least half-time, and the rent doesn’t exceed the school’s published cost of attendance for housing. If the rent is above that, the excess portion will be treated as a non-qualified expense.

Q: Is there a deadline to use the money in a 529?

No. The funds can remain invested indefinitely. You can also change the beneficiary to another family member or use it later for graduate school, medical school, or even student loan repayment (up to $10,000 per beneficiary).

Q: What if my income is too high for tax credits? Do I still need to coordinate with the AOTC?

Probably not. If your MAGI exceeds the IRS limit for the American Opportunity Tax Credit ($180,000 for joint filers), you’re not eligible, so you don’t need to set aside non-529 funds to claim it.

Q: Can I take the money out in December to cover January’s tuition?

Yes. As long as the expense and the distribution occur in the same calendar year. If tuition is due in January, but you withdraw the money in December, make sure the payment is also processed before year-end.

Q: Is the 529 plan still worth using if my child might get a full scholarship?

Yes. If your child receives a scholarship, you can withdraw up to the amount of the award without penalty (though you’ll pay income tax on the earnings). Alternatively, you can keep the funds invested for another child or future education expenses like grad school.