The basic answer: it depends on the account type and what you withdraw the money for

Education savings accounts come in different forms, and the tax treatment depends on which one you use. The most common are 529 plans (also called may have access to tuition programs) and Coverdell Education Savings Accounts (ESAs). Both offer tax advantages, but the rules about what you pay taxes on are different for each.

The money you put into these accounts is not tax-deductible at the federal level — you contribute with after-tax dollars. However, the earnings (the interest and investment gains your money makes) grow tax-free. The real question is whether you owe taxes when you take the money out.

Key Takeaways

  • Money you deposit into a 529 plan or Coverdell ESA grows without being taxed each year, which is the main tax advantage.
  • Withdrawals for may have access to education expenses — tuition, fees, books, room and board — are tax-free in both account types.
  • If you withdraw money for non-education purposes, you owe income tax on the earnings portion plus a 10 percent penalty in most cases.
  • Some states offer state income tax deductions for 529 contributions, which is separate from the federal tax-free growth.
  • The rules changed in 2024 to allow limited rollovers from 529 plans to Roth IRAs, creating a new tax-planning option.

How 529 plans handle taxes on withdrawals

A 529 plan lets your money grow without annual taxes. When you withdraw funds, the withdrawal is split into two parts: your original contribution (which was never taxed) and the earnings (which have grown tax-free). If you use the money for may have access to education expenses, both parts come out tax-free.

may have access to expenses include tuition and mandatory fees at any accredited college, university, or vocational school. They also include room and board if the student is enrolled at least half-time, books, supplies, and computers. Some 529 plans now allow up to $35,000 per year in withdrawals for K-12 tuition at private schools, and up to $2,350 per year for student loan repayment.

If you withdraw money for something other than these purposes, you owe income tax on the earnings portion only — not on what you originally put in. You also owe a 10 percent penalty on those earnings. For example, if you contributed $10,000 and it grew to $12,000, and you withdraw $12,000 for a non-may have access to expense, you pay income tax plus a 10 percent penalty on the $2,000 in earnings.

Coverdell Education Savings Accounts and their tax rules

A Coverdell ESA works similarly to a 529 in terms of tax treatment: contributions are not deductible, earnings grow tax-free, and withdrawals for may have access to education expenses are tax-free. The may have access to expenses are broader than 529s — they include K-12 tuition and expenses, not just college.

The main difference is that Coverdell accounts have stricter limits. You can only contribute $2,000 per year per child, and you cannot contribute once the child turns 18. The account must be used by the time the child turns 30, or the remaining balance becomes taxable.

If you withdraw from a Coverdell for non-may have access to expenses, the same rule applies: you owe income tax on the earnings portion plus a 10 percent penalty. The earnings are taxed at your ordinary income tax rate, not at a special rate.

State income tax deductions for 529 contributions

Some states offer an additional tax break: a deduction on your state income tax return for money you contribute to a 529 plan. This is separate from the federal tax-free growth. If your state offers this deduction, you reduce your taxable income in that state by the amount you contribute, which lowers your state income tax bill.

Not all states offer this deduction, and the rules vary. Some states limit the deduction to contributions made to their own state's 529 plan, while others allow deductions for contributions to any state's plan. A few states have no income tax at all. Check your state's tax authority website or speak with a tax preparer to learn whether your state offers this benefit and what the limits are.

What happens if you change beneficiaries

If you change the beneficiary of a 529 plan to another family member — for example, from one child to a sibling — there is no tax consequence. The account continues to grow tax-free, and withdrawals for the new beneficiary's education are still tax-free. This flexibility is one reason 529 plans are popular for families with multiple children.

Changing beneficiaries on a Coverdell ESA works the same way, as long as the new beneficiary is under 30 years old and is a family member of the original beneficiary.

The 2024 change: rolling 529 funds into a Roth IRA

Starting in 2024, new rules allow you to roll money from a 529 plan into a Roth IRA under certain conditions. The funds must have been in the 529 for at least 15 years, and the annual rollover is limited to the annual Roth IRA contribution limit (which is $7,000 in 2024, but changes yearly). The rolled-over funds are not subject to the 10 percent penalty, and they grow tax-free in the Roth IRA.

This option is useful if a child receives a scholarship or decides not to attend college — instead of paying the penalty on a 529 withdrawal, you can move the money into retirement savings. However, the 15-year waiting period means this strategy works best for accounts opened when a child is young.

How earnings are taxed if you do withdraw for non-may have access to expenses

When you withdraw for a non-may have access to expense, the IRS considers the earnings portion to be ordinary income. This means it is taxed at your regular income tax rate, which depends on your tax bracket. If you are in the 22 percent tax bracket, you owe 22 percent of the earnings in federal income tax, plus the 10 percent penalty, plus any state income tax your state charges.

There are a few exceptions to the 10 percent penalty. If the beneficiary receives a scholarship, you can withdraw an amount equal to the scholarship without the penalty (though you still owe tax on the earnings). If the beneficiary attends a U.S. military academy, you can withdraw without penalty. If the beneficiary becomes disabled or passes away, the penalty is waived.

Frequently Asked Questions

Do I have to pay taxes on the money I put into a 529 plan?

No. You contribute with money you have already paid income tax on. The account itself does not reduce your federal taxable income. However, some states offer a state income tax deduction for 529 contributions, which is a separate benefit.

What counts as a may have access to education expense for tax-free withdrawals?

For college: tuition, fees, room and board (if enrolled half-time or more), books, supplies, and computers. For K-12 private school: tuition and fees only. For student loans: up to $2,350 per year in repayment. Check your plan's rules, as some offer additional may have access to expenses.

If I withdraw money for something other than education, do I owe taxes on the whole amount?

No, only on the earnings portion. Your original contributions come out tax-free. If you contributed $10,000 and it grew to $13,000, and you withdraw for a non-may have access to expense, you owe tax and a 10 percent penalty only on the $3,000 in earnings.

Can I move money from a 529 to a Roth IRA without penalties?

Yes, if the 529 account has been open for at least 15 years. The rollover amount is limited to the annual Roth contribution limit. This avoids the 10 percent penalty but requires a long holding period.

Does my state tax 529 withdrawals?

Most states do not tax withdrawals for may have access to education expenses, but a few do. Check your state's tax authority website or ask a tax preparer about your specific state's rules.