529 non-qualified withdrawals in 2026: what you really pay to take the money back
Taking money out for something other than school is allowed. The bill falls on the growth, not on what you put in, and it is often smaller than people fear.
Tax on this withdrawal
$2,497
You keep $12,503 of $15,000. Only the earnings part is taxed federally.
| Earnings part | $6,750 |
| Federal income tax at 22 % | $1,485 |
| 10 % additional tax | $675 |
| Georgia tax and add-back | $337 |
Scholarship exception: the 10 % is waived up to the tax-free scholarship, income tax still applies. Georgia: Portion of a nonqualified or taxable withdrawal, or of a rollover to another state's 529 plan, attributable to previously deducted contributions is added to Georgia taxable income in the year of withdrawal or rollover; earnings of nonqualified withdrawals are also taxed.
Worked out by Radif Partners · How we calculate · federal rules from Public Law 119-21 and IRS Publication 970, state rules from each state · not tax advice
A 529 withdrawal that does not pay qualified education costs is split in two: the part that returns your own contributions comes back tax-free, and only the earnings part is taxed, as ordinary income of the person who receives the money, plus a 10 % additional federal tax. A couple in Georgia who take $15,000 from an account that is 45 % growth would owe about $2,497 in total, federal, additional and state tax together, and keep $12,503. The 10 % does not apply when the beneficiary dies or becomes disabled, up to the amount of a tax-free scholarship or other tax-free aid, for attendance at a U.S. military academy, or when the costs were used for an education credit. Many states also take back the deduction they gave on the way in. A partly qualified withdrawal is taxed only in proportion to the costs it did not cover.
Contributions come back free, growth is taxed
Each 529 withdrawal carries a share of your contributions and a share of the growth, in the same proportion as the whole account. The plan reports both on Form 1099-Q: box 1 for the withdrawal, box 2 for earnings, box 3 for basis, the contributions returning to you. Box 3 is never taxed. Box 2 is taxed when the withdrawal goes beyond the qualified costs of the year, at the ordinary federal rate of whoever is treated as receiving it, and the same amount carries the 10 % additional tax.
Who receives it matters. IRS Publication 970 treats the beneficiary as the recipient only if the money goes to the beneficiary directly or to a school for the beneficiary; in every other case the account owner is the recipient. A student in a low bracket may pay less on the same earnings than a parent in a high one.
The Georgia couple of the summary illustrate it. Of their $15,000, $6,750 is growth. At their 22 % federal rate, that slice costs $1,485, plus $675 of additional tax and $337 at the Georgia rate of 4.99 %. Georgia's own text on deductions: Portion of a nonqualified or taxable withdrawal, or of a rollover to another state's 529 plan, attributable to previously deducted contributions is added to Georgia taxable income in the year of withdrawal or rollover; earnings of nonqualified withdrawals are also taxed.
Your withdrawal, your account
Tax on this withdrawal
$2,497
| Earnings part | $6,750 |
| Federal income tax at 22 % | $1,485 |
| 10 % additional tax | $675 |
| Georgia tax and add-back | $337 |
Partly qualified: a proportional rule
Most real cases are mixed. A student's bills for the year come to a certain sum, a scholarship covers some of it, and the 529 pays out a round figure that turns out larger than what was left. The IRS starts from the adjusted qualified education expenses: qualified costs minus tax-free help such as scholarships, Pell grants, veterans' benefits and employer assistance. The tax-free share of the earnings is the earnings multiplied by those adjusted expenses and divided by the total withdrawn.
Take a withdrawal of $12,000 with $3,000 of earnings, against $9,000 of costs left after a scholarship. Earnings of $2,250 stay free, and $750 is taxable. The scholarship exception, below, then lifts the additional tax from that part, up to the scholarship. Spending more on qualified costs in the same calendar year, such as books or a laptop, lowers the taxable share; spending in January does not count for a December withdrawal.
Six cases without the 10 %
Income tax on the earnings applies in all of them. What goes away is the additional tax, under the list of IRS Publication 970:
- the money is paid to a beneficiary or to the estate on or after the death of the designated beneficiary;
- the beneficiary is disabled, with a physician's determination that the condition is expected to last indefinitely or result in death;
- the beneficiary received a tax-free scholarship or fellowship, veterans' educational assistance, employer-provided educational assistance or other tax-free educational help, other than gifts or inheritances, up to that amount;
- the beneficiary attends a U.S. military academy, up to the cost of advanced education attributable to that attendance;
- the withdrawal is taxable only because the same costs were used for the American opportunity or lifetime learning credit;
- a refund of qualified costs can instead go back into a 529 for the same beneficiary within 60 days, in which case there is no taxable withdrawal at all.
For a student with a full scholarship, $10,000 taken out with 35 % growth by a single filer at $60,000 costs $770 with the exception instead of $1,120 without it. The difference is exactly the 10 % on the earnings. The education credits page explains the credit case.
With a scholarship
Tax on this withdrawal
$945
| Earnings part | $3,500 |
| Federal income tax at 22 % | $770 |
| 10 % additional tax | $0 |
| Georgia tax and add-back | $175 |
The state layer: add-backs
A state that gave a deduction when money went in usually wants it back when the money leaves for a non-qualified use. 35 of the states with a 529 deduction or credit describe an add-back or recapture in the texts we read; the exact rule differs. Some add back the full withdrawal, some the deductions you actually took, some only within a few years of the contribution. A few add a penalty of their own. Each state page quotes its rule; the recapture page compares them and the deduction table shows which states gave a deduction in the first place.
Before you take the money
A non-qualified withdrawal is rarely the only exit. The account can move to a sibling or cousin without tax, wait for graduate school, repay up to $10,000 of student loans, or feed a Roth IRA for the beneficiary once it has been open 15 years. When the balance is mostly contributions, on the other hand, the cost of simply withdrawing is small, because only the growth pays. The leftover money page compares the options with numbers.