Using a 529 plan to save for your child's college expenses can help them avoid college debt while achieving educational goals. Saving in a 529 plan is generally straightforward, but accidentally taking too much money from the account can result in "unqualified" withdrawals.

If you find that you have over-withdrawn from your 529 account, there are several options available to you. But it's important that you act quickly because there are certain time limits you need to follow!

Recontribute Excess Funds Within 60 Days

If you have taken out too much money from your 529 account, you can recontribute the funds within 60 days of the initial withdrawal. The time to recontribute is extended if you receive a refund from your school, such as if you drop a class. At that point, you have 60 days from the date of the refund.

Contact your plan provider for guidance on the process.

Use The Excess Funds For Qualified Education Expenses

If you over-withdrew funds in January, you have until December 31 of the calendar year to spend the money on qualified expenses. Qualified expenses include tuition, room and board, books, computers, software, and more. You may be surprised to learn what counts as a qualified expense.

Figuring out how to spend the money on qualified expenses is much more difficult in December when you only have a few weeks to find the qualified expenses. However, you can ask your college if it will accept tuition prepayment or allow you to pay for other qualified expenses before the calendar year runs out.

If you are uncertain about qualified expenses, consult with your college or university.

Rollover The Funds Within 60 Days

If you have a separate 529 account for the same beneficiary or a different one, you may choose to "roll over" the over-withdrawn amount to another account.

You have 60 days from the time of distribution to complete the rollover. You can also roll over the funds to an ABLE account, which is designed to support a person with a disability.

Pay The Taxes But Avoid The Penalty

Withdrawing too much money from your 529 plan results in paying income tax and a 10% penalty on the earnings for any amount that was not put towards qualified education expenses.

For example, if you withdrew $10,000, but you only had $9,000 in qualified expenses—you went over by $1,000. Of that $1,000, you can calculate how much you contributed compared to the amount you earned in the account. If 40% of your account was contributions and the rest earnings, then you earned $600.

That means you’ll pay tax on the $600 plus an additional penalty of $60.

While you typically have to pay the 10% penalty when you use the 529 account money for non-qualified expenses, there are several ways you can get out of the penalty, per the IRS.

These include situations in which the beneficiary:

TurboTax and other tax software can help you avoid this penalty if you qualify under one of these circumstances. However, you may also want to work with a tax professional to ensure you’re claiming everything correctly.

Think Before You Spend 529 Leftovers

If you have leftover money in your 529 account. Whether you have the money because your child didn’t go to college or because you got a great scholarship, the 529 plan isn’t a waste. And, you don’t have to withdraw the money right away.

You can avoid the taxes or the 529 penalties by choosing one of these options:

You may decide that none of these options fits your goals. But when you know the options available to you, you can make smarter decisions about when to pay taxes and when to avoid them.

If All Else Fails, Pay The Taxes And Penalty

If none of the above options make sense for you, paying taxes on the excess earnings and a 10% penalty may be the last resort.

Many times, 529 accounts grow primarily through contributions and less through “earnings” or market growth. You may find that you owe taxes and a 10% penalty on a relatively small amount of earnings.

If that’s the case, it may be worthwhile to pay rather than bother to re-contribute funds or figure out a way to make yourself whole. Paying penalties is never ideal, so this is the last option to consider.