Withdrawals for qualified educational expenses are not taxed. Qualified educational expenses include tuition, fees, books and supplies, equipment, and room and board. If you withdraw money from a 529 plan that is not used for qualified education expenses, you are generally required to pay income tax and an additional 10% penalty on earnings.
There are a number of exceptions to this penalty. The penalty may be waived if your child gets a scholarship or is disabled. You also can avoid taxes and penalties by transferring the 529 plan to another beneficiary in your family who will use the funds for qualified education expenses.
To help you determine how much you should be setting aside in a 529 educational savings plan, see the college calculator of the Financial Industry Regulatory Authority (FINRA) available at Investor Information/Calculators.
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