Withdrawing 529 Plan Funds for Non-Educational Purposes

A piggy bank looking at a hammer.

Opening a 529 education fund is a smart financial move for families, especially with the rising cost of college. Besides college expenses, the money also can be used to pay for K–12 tuition at public and private schools in many states, including North Carolina.

Many parents choose 529 accounts because the earnings grow tax-free if it’s used for qualified education expenses. Opening an account when children are young can accumulate thousands of dollars in interest and money saved on taxes. That can be a nice chunk of change by the time a child is headed off to college.

But what if money gets tight or there is a family emergency? The account is still your money, and you’re allowed to make 529 plan withdrawals that are not for educational purposes at any time. However, you will have to pay taxes and penalties on the earnings, so this should be a last resort.

Non-Educational Withdrawals

Things happen, and you need to do what’s right for your family. However, first consider other financial solutions, or whether changing your contribution amount could ease the financial strain in your family. For example, if you’re using automatic bank transfers to contribute $100 a month to a 529 account, can you reduce that amount for a few months, until you get back on your feet? You can change future contributions at any time.

When taking NC 529 Plan withdrawals that are not for education, the earnings will be subject to:

  • Federal income taxes
  • North Carolina state income taxes
  • Local income taxes
  • A 10 percent withdrawal penalty

Taxes, and especially the early withdrawal penalty, can take a big bite out of the money you worked so hard to save. Whenever possible, hanging onto a tax-advantaged 529 account and using the money for qualified education expenses is the best way to reap the rewards of your early planning and saving.

What are Qualified Education Expenses?

There is a long list of qualified education expenses that 529 funds can be used to pay. Money can be used at any educational institution that accepts federal financial aid for students. In North Carolina, NC 529 Accounts can be used to pay education expenses at any in-state or out-of-state school that meets this requirement. You can use the money for:

  • College or K–12 tuition
  • Books and fees
  • Room and board
  • Computers
  • Trade or vocational schools
  • Special needs equipment

What else can you do with the account if your children don’t use all the money for their educations?

How to Handle Leftover Funds

It’s possible that you could find yourself in a position where your children are happily pursuing careers they love, and there is money left over in a college savings account. You may consider making a 529 plan withdrawal that’s not for educational purposes. However, it’s still financially savvy to keep the money in the 529 account to avoid unnecessary taxes and penalties.

One way to continue taking advantage of the plan’s tax benefits is to change the beneficiary to another family member, even yourself. There are no penalties for assigning a new beneficiary to the account. Have you ever thought about going to graduate school? Grad school programs fall under the category of qualified education expenses.

You can even hold onto the 529 plan until a grandchild is born and then make them the beneficiary. What an amazing gift for a future family member!