Is a 529 withdrawal taxable?

The rule

Publication 970 says the part of a distribution representing the amount paid or contributed to a qualified tuition program does not have to be included in income; that is a return of your investment. The recipient generally does not have to include in income any earnings distributed if the total distribution is less than or equal to the beneficiary's adjusted qualified education expenses (AQEE). The designated beneficiary is treated as the recipient only if the distribution went directly to the beneficiary or to an eligible school for the beneficiary's benefit; otherwise the account owner is. Form 1099-Q reports the gross distribution in box 1, earnings in box 2 and basis in box 3.

Finding AQEE

AQEE is total qualified education expenses reduced by tax-free educational assistance: the tax-free part of scholarships and fellowships, veterans' educational assistance, the tax-free part of Pell grants, employer-provided educational assistance, and any other nontaxable educational assistance other than gifts and inheritances. It is then reduced again by any expenses used to figure an education credit. That is the answer to a question many families ask, whether they can claim an education credit and use 529 money for the same bills. The publication says an American opportunity or lifetime learning credit can be claimed in the same year as a tax-free 529 distribution, as long as the same expenses are not used for both benefits.

Loans, gifts, wages and withdrawals from the student's own savings do not reduce qualified expenses. Only tax-free assistance and credit-supporting expenses do.

The formula, with the publication's example

If the distribution exceeds AQEE, multiply the earnings in box 2 by a fraction: AQEE paid during the year over the total distributed. Subtract that from the total earnings, and the remainder is taxable and goes on Schedule 1 (Form 1040), line 8z. In the publication's first example, a student has $8,300 of qualified expenses, a $3,100 tax-free scholarship and a $5,300 distribution including $950 of earnings. AQEE is $5,200; tax-free earnings are $950 x $5,200 / $5,300 = $932; taxable earnings are $18.

In its second example the parents also claim an American opportunity credit based on $4,000 of expenses. AQEE drops to $8,300 - $3,100 - $4,000 = $1,200, tax-free earnings fall to $950 x $1,200 / $5,300 = $215, and taxable earnings rise to $735. The credit and the 529 compete for the same dollars, so compare the combinations before you file. The calculator above reproduces both examples: enter 950, 5,300, 8,300, 3,100 and 0 or 4,000.

The 10% additional tax and its exceptions

Publication 970 says a taxable distribution generally also carries a 10% additional tax on the amount included in income. It does not apply to distributions paid after the death of the beneficiary or because of disability, to amounts included in income because of tax-free scholarships or other tax-free assistance (up to that assistance), to distributions made on account of attendance at a U.S. military academy within limits, or to amounts taxable only because the expenses were also used for a credit. Figure it in Part II of Form 5329 and report it on Schedule 2, line 8.

Rollovers, Roth IRAs and the loss rule

Moving the money instead of spending it can avoid tax. A distribution rolled over within 60 days to another 529 for the same beneficiary or a family member, or to an ABLE account, is not taxable. A direct trustee-to-trustee transfer from a 529 open more than 15 years to a Roth IRA for the same beneficiary is also not taxable, subject to the publication's limits: the amount cannot exceed contributions (and attributable earnings) made more than five years earlier, and it counts against the annual Roth contribution limit. Separately, for tax years beginning after 2017 and before 2026, a loss on a 529 account cannot be claimed on the return. State tax treatment is not covered by the publication.

Sources

• IRS Publication 970, Tax Benefits for Education (2025): Chapter 7, Are Distributions Taxable?. Read November 2, 2026.

Edition read: Publication 970 (2025), for use in preparing 2025 returns. Dollar limits, income thresholds and dates in this publication are for tax year 2025; check the current publication and form instructions for the year you file. This page summarizes the publication and does not replace it.