Smart529

Qualified and Non-qualified Distributions


Qualified Distributions

This type of distribution is used to pay for the designated beneficiary's qualified higher education expenses at an eligible higher educational institution.* As defined by federal law, qualified higher education expenses include:

  • Tuition, fees, books, supplies and equipment required for enrollment or attendance of a designated beneficiary at an eligible educational institution.
  • The cost of room and board for a designated beneficiary enrolled at least half time. In general, reasonable room and board should not exceed:
    • The allowance for room and board included in the cost of attendance by the eligible educational institution; or
    • The actual amount charged, if the designated beneficiary is residing in housing owned or operated by the eligible educational institution.  
  • Expenses for special needs services that are incurred in connection with the enrollment or attendance of a special needs designated beneficiary at an eligible educational institution.

* Eligible higher education institutions include most traditional colleges and universities across the country, as well as many trade schools and adult vocational programs. You should check with the student financial aid office at the respective institution or with the federal Department of Education at 1-800-433-3243 to determine if the school is an eligible educational institution (i.e., eligible to participate in federal student financial aid programs under the Higher Education Act).

Non-qualified Distributions

A Non-Qualified Distribution is any distribution that is not a Qualified Distribution. You may request a Non-Qualified Distribution at any time. However, the earnings portion of a Non-Qualified Distribution may be subject to a 10% federal income tax penalty in addition to any income taxes that may be due. There may also be state tax consequences. The earnings portion of a Non-Qualified Distribution is taxable to the individual who receives the payment, either the Account Owner or the Designated Beneficiary. If the payment is not made to the Designated Beneficiary or to an Eligible Educational Institution for the benefit of the Designated Beneficiary, it will be deemed to have been made to the Account Owner.

If you are a West Virginia taxpayer and you took a deduction for a contribution, you need to recapture the contribution portion of a Non-Qualified Distribution on your West Virginia personal income tax return. Please consult with a qualified tax advisor for more information.

In the event that the Designated Beneficiary receives a scholarship for Qualified Higher Education Expenses, you can request a federal income tax penalty-free distribution from your Account for the amount of the scholarship. If you withdraw an amount equal to or less than the scholarship from the Account and do not use it for Qualified Higher Education Expenses, the amount of the distribution that represents earnings will be subject to ordinary income tax, but will not be subject to a 10% federal income tax penalty. You should consult a qualified tax advisor to ensure that these distributions are correctly characterized on your income tax returns.

There is a $50 Account Cancellation Charge for any Non-Qualified Distribution that totally depletes an Account. Although it remains a non-qualified distribution, we waive the charge in the event of the death of the Designated Beneficiary.

Updated 12/08/2015