Tapping your 529 plan to pay bills

Kathryn FlynnBy: Kathryn FlynnBy: Savingforcollege.com | 
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A good rule of parenting is to expect the unexpected. Yet, according to Bankrate, only 22 percent of Americans had enough money saved to cover six months of expenses in the event of an emergency, and 29 percent had nothing saved. So what happens if your family suffers from a sudden job loss, medical bills or damage to your home? In times of need, those without a liquid emergency fund sometimes view their 529 college savings plans as a source of cash. In some cases, this could be a viable option. According to Joe Hurley, CPA and founder of Savingforcollege.com, with a 529 plan 'You're not locked in, you can get at your money, and if your account has losses, you have some flexibility.'

Yet there are generally consequences of withdrawing from a 529 plan for purposes other than paying for college. These investment vehicles were specifically designed to help families pay for college, and offer federal and state tax benefits - but only if used properly. With a few exceptions, such as when the beneficiary receives a scholarship, the earnings portion of non-qualified withdrawals will incur federal income tax as well as a 10% penalty. You may also owe state taxes if you claimed a deduction or credit for your contributions. That’s why in most cases it’s best to have a separate fund for emergencies.

Find your 529 plan - Select your state below

Did you know that residents are not limited to investing in their own state's plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state's plan and other options.

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Find a 529 Plan. Select your state below.

Did you know that residents are not limited to investing in their own state’s plan? Another state may offer a plan that performs better and has lower fees. Select your state below to see your state’s plan and other options.

But if you do find yourself in a situation where you must take a non-qualified 529 plan withdrawal, here are a few tips.

RELATED: Top 10 financial mistakes Millennial parents make

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Kathryn Flynn

Kathryn Flynn

Content Director

Kathryn is Content Director at Savingforcollege.com. She has been quoted in financial publications including the Wall Street Journal, the NY Times, Fortune, Money and GOBankingRates, and has been an expert guest on personal finance podcasts. Prior to Savingforcollege.com, Kathryn worked in product marketing at Henderson Global Investors (now Janus Henderson Investors), a global asset manager. She earned her MBA with Finance Concentration from DePaul University's Kellstadt Graduate School of Business, and has prior FINRA Series 7 and 63 licenses. Kathryn has 529 college savings plans for each of her three children, and enjoys creating content to help other families prepare for future higher education costs.