Summary: While 529 plan distributions are tax-free at the federal level for qualified education expenses, state tax treatment varies significantly. Some states don’t recognize K-12 tuition as a qualified expense, others impose recapture on outbound rollovers, and a few have unique penalty rules. Twenty states fully conform to federal 529 tax laws, while the rest have at least one area of nonconformity.
529 plans were added to the Internal Revenue Code in 1996 to authorize federal tax-free status of state college savings plans. Federal tax benefits of 529 plans include tax-deferred investment growth, tax-free distributions for qualified education expenses, and tax-free 529 plan rollovers.
However, some states do not fully conform with the federal laws regarding 529 plans, which can create unexpected tax consequences for families.
How are 529 plan distributions taxed at the federal level?
529 plan distributions are exempt from federal income tax when the funds are used to pay for qualified higher education expenses. This includes tuition, fees, books, supplies, special needs equipment, computers, internet access, and room and board when the student is enrolled at least half-time and pursuing a degree or certificate program.
The Tax Cuts and Jobs Act of 2017 expanded the definition of qualified higher education expenses to include K-12 tuition. The annual limit was $10,000 per beneficiary through 2025, and increased to $20,000 per beneficiary in 2026.
Starting July 4, 2025, the One Big Beautiful Bill Act further expanded qualified K-12 expenses to include curriculum materials, tutoring services, standardized test fees, dual enrollment fees, and licensed educational therapies for students with disabilities.
Non-qualified 529 plan distributions are subject to income tax and a 10% penalty on the earnings portion of the withdrawal. Each distribution from a 529 plan contains a prorated portion of earnings and principal.
There are some exceptions to the penalty tax, such as when the beneficiary gets a scholarship, attends a U.S. Military Academy, receives educational assistance through a qualifying employer program, becomes disabled, or dies.
529 plan account owners may lower their potential tax liability by making distributions payable to the beneficiary. If there are any non-qualified distributions to report, the earnings will be taxed at the beneficiary’s lower tax rate.
How are 529 plan distributions taxed at the state level?
In most cases, qualified 529 plan distributions are also exempt from state income tax. However, some states have unique rules regarding taxation of 529 plan distributions:
- Alabama: Distributions from an out-of-state 529 plan are considered non-qualified. For Alabama state income tax purposes, the full amount of a non-qualified distribution plus 10% of the distribution amount must be added back to the contributing taxpayer’s income.
- California: Imposes an additional 2.5% penalty tax on non-qualified distributions.
- Georgia: Requires that earnings from non-qualified distributions be reported on the account owner’s (not the beneficiary’s) Georgia income tax return.
- Montana: Non-qualified 529 plan distributions within 3 years of the account opening are taxed at Montana’s highest marginal income tax rate.
- Wisconsin: Distributions taken within 365 days of a contribution must be added back to Wisconsin taxable income if previously deducted.
Do all states allow tax-free 529 distributions for K-12 tuition?
No. While federal law allows up to $10,000 per year (increasing to $20,000 in 2026) in tax-free 529 distributions for K-12 tuition, not all states conform to this tax law.
In states that don’t recognize K-12 tuition as a qualified expense, 529 plan distributions used to pay for elementary or secondary school tuition are considered non-qualified. The earnings portion of the withdrawal is subject to state income tax. If you previously claimed a state income tax deduction for your contributions, that tax benefit may also be subject to recapture.
States may also take time to adopt the expanded K-12 expense categories (tutoring, curriculum materials, etc.) that became federally qualified on July 4, 2025. Until your state formally conforms, these expenses may not qualify for state tax benefits.
States that do NOT recognize K-12 tuition as a qualified 529 expense: California, Colorado, Connecticut, Hawaii, Illinois, Michigan, Minnesota, Montana, Nebraska, New Mexico, New York, Oregon, and Vermont.
Note that you can still take federal tax-free withdrawals to pay for K-12 tuition even if your state doesn’t conform. You’ll only face state-level taxes on the earnings portion.
Are 529 plan rollovers to another state taxable?
At the federal level, funds may be transferred from one 529 plan to another 529 plan for the same beneficiary without tax consequences, as long as the rollover is completed within 60 days of the distribution. 529 plan rollovers can be completed once every 12 months for the same beneficiary.
However, most states do not conform to the federal tax treatment of 529 plan rollovers. In these states, distributions used to fund another state’s 529 plan are considered non-qualified and subject to state income taxes on the earnings portion of the distribution. If you previously claimed a state income tax deduction or credit, those benefits may also be subject to recapture.
This is particularly important for families who move to a new state and want to take advantage of their new state’s income tax deduction by rolling funds into that state’s plan.
Which states fully conform to federal 529 tax laws?
Twenty states follow the federal tax treatment for 529 plan distributions, conform to the federal definition of qualified higher education expenses (including K-12 tuition), and allow tax-free outbound 529 plan rollovers:
- Arizona
- Connecticut
- Delaware
- Florida
- Kansas
- Kentucky
- Maine
- Maryland
- Massachusetts
- Nevada
- New Hampshire
- New Jersey
- North Carolina
- North Dakota
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Washington
- West Virginia
Note that some of these states have no state income tax, which simplifies conformity. Also note that Arizona and Connecticut appear in both the conforming list and the nonconforming table below because they don’t recognize K-12 tuition as qualified but do conform in other areas.
Which states do not conform to federal 529 tax laws?
The following states have at least one area where they do not conform to federal 529 tax treatment:
State |
Unique taxation rules |
K-12 distributions tax-free? |
Outbound rollovers subject to recapture? |
Alabama |
Out-of-state plans treated as non-qualified; non-qualified withdrawals plus 10% added to income |
Yes |
Yes |
Arizona |
No |
||
Arkansas |
Yes |
Yes |
|
California |
2.5% state penalty tax on non-qualified distributions |
No |
|
Colorado |
No |
Yes |
|
Connecticut |
No |
||
District of Columbia |
Yes |
Yes, if within 2 years of opening |
|
Georgia |
Non-qualified earnings reported on account owner’s return, not beneficiary’s |
Yes |
Yes |
Hawaii |
No |
||
Idaho |
Yes |
Yes |
|
Illinois |
No |
Yes |
|
Indiana |
Yes |
Yes |
|
Iowa |
Only Iowa K-12 schools or those accredited under Iowa Code Section 256.11 |
Yes |
|
Louisiana |
Only through START K12 program |
||
Michigan |
No |
||
Minnesota |
No |
||
Mississippi |
Yes |
||
Missouri |
Yes |
||
Montana |
Distributions within 3 years of opening taxed at highest marginal rate |
No |
Yes |
Nebraska |
No |
Yes |
|
New Mexico |
No |
Yes |
|
New York |
No |
Yes |
|
Ohio |
Yes |
Yes |
|
Oklahoma |
Yes |
Yes, if within 12 months of contribution |
|
Oregon |
No |
||
Rhode Island |
Yes |
Yes, within 2 years of claiming tax benefit |
|
South Carolina |
Yes |
||
Utah |
Yes |
Yes |
|
Vermont |
No |
Yes |
|
Virginia |
Yes |
Yes |
|
Wisconsin |
Distributions within 365 days of contribution added back if previously deducted |
Yes |
ScrollSwipe to see full table
Blank cells indicate the state conforms to federal treatment in that area.
Key Takeaways
- Federal law allows tax-free 529 distributions for qualified education expenses, including up to $10,000 in K-12 tuition (increasing to $20,000 in 2026).
- Not all states conform to federal 529 tax treatment, creating potential state tax consequences.
- Thirteen states don’t recognize K-12 tuition as a qualified expense, meaning withdrawals for elementary or secondary school may trigger state taxes.
- Most states treat outbound rollovers to another state’s 529 plan as non-qualified distributions subject to recapture.
- Twenty states fully conform to federal 529 tax laws for distributions, K-12 expenses, and rollovers.
- Always check your state’s specific rules before taking distributions for K-12 tuition or rolling funds to another state’s plan.
Frequently Asked Questions
Yes, you can still use your 529 plan for K-12 tuition even if your state doesn’t recognize it as a qualified expense. Your withdrawal will be tax-free at the federal level. However, you may owe state income tax on the earnings portion and could face recapture of any state tax deductions you previously claimed.
At the federal level, rollovers between 529 plans are tax-free if completed within 60 days. However, most states treat outbound rollovers as non-qualified distributions. You may owe state income tax on the earnings and face recapture of any state tax deductions previously claimed. Check your state’s specific rules before rolling over.
Yes. California imposes an additional 2.5% state penalty tax on the earnings portion of non-qualified 529 plan distributions. This is on top of regular state income tax. California also does not recognize K-12 tuition as a qualified expense, so withdrawals for elementary or secondary school would be subject to this penalty.
The annual K-12 withdrawal limit increases from $10,000 to $20,000 per beneficiary starting in tax year 2026. This change was enacted by the One Big Beautiful Bill Act, signed into law on July 4, 2025. The higher limit applies at the federal level, but state conformity may vary.
Starting July 4, 2025, federal law expanded qualified K-12 expenses beyond just tuition to include curriculum materials, tutoring services, standardized test fees, dual enrollment fees, and licensed educational therapies for students with disabilities. However, states may take time to adopt these expanded categories, so check your state’s rules before withdrawing for these expenses.
Check the table in this article for your state’s specific treatment of K-12 distributions and outbound rollovers. You can also contact your 529 plan administrator or state tax authority for the most current information. States may update their conformity rules in response to federal changes, so it’s worth verifying before making withdrawals for newly expanded expense categories.
