Can I withdraw money for K-12 expenses?
Yes. K-12 tuition is eligible for tax-free withdrawals. Other educational expenses that qualify for college students (room and board, equipment, etc.) do not qualify for K-12 students.
Can I withdraw money to pay for student loans?
You can use up to $10,000 for student loan repayment (one time).
What expenses qualify for tax-free withdrawals?
Qualified higher education expenses generally include:
- Mandatory fees
- Room and board
- Textbooks, supplies and equipment
- Computer or peripheral equipment
- Computer software
- Internet access and related services for college students
- Special needs services for a beneficiary with special needs
- K-12 tuition – up to $10,000 a year
- Student loan repayment – one time, up to $10,000
What happens if I withdraw for other expenses?
If you withdraw money for non-qualified expenses, you are subject to paying taxes and a 10% penalty on any gains that are part of your withdrawal. The amount of your original contributions are not subject to taxes or the penalty.
Are there exceptions to the penalty on withdrawals for other expenses?
There are 3 exceptions to the 10% penalty:
- The student beneficiary receives a scholarship and doesn’t need the funds for school
- The student beneficiary dies
- The student beneficiary enrolls in a U.S. service academy
In each of these cases, you will still owe taxes on the gains that you withdraw, but you won’t owe the 10% penalty. To avoid taxes, you can transfer the account to a new student beneficiary.
What happens if the beneficiary doesn’t go to college?
To avoid any taxes or penalties on withdrawals, your best option is to transfer the account to a new beneficiary who will use the money for educational expenses. Otherwise, the gains on any withdrawals from the account will be subject to taxes and a 10% penalty.