The Best 529 Plans Blog

The Fine Print on Distribution Rules

Description: There is probably nothing more complicated than the rules around distribution and we don’t think it’s unintentional.

States “offer” a 529 plan as a benefit to its residents or to encourage investments by out-of-staters. That money carries a float meaning that the state can reinvest the money you’ve deposited because they won’t have to distribute it or give it back to you for years later. Making the distribution rules complicated gives the state all the more ability to hold onto your money.

So let’s break it down:

• You can only use the money in a 529 plan for college, not for high school or grades below.
• You can let anyone who is blood related use the money for college, including yourself or a spouse.
• If you take the money out, you will have to pay the taxes on the investment earnings AND a 10% penalty. That’s a steep penalty so you want to avoid paying this.
• If your child gets a scholarship, you can pull the money out of the 529 without a penalty but you will pay the taxes on the investment earnings.
• There are other exceptions but for the most part, the reason why you get a benefit from the 529 is being you’re willing to sign up for the terms that limit you from taking money out unless it’s for college.

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