<p>Does anyone know if using distributions from a 529 Plan to pay off educational loans is an allowable use for 529 Plan and/or Educational Savings Account distributions?</p>
<p>Allowable withdrawals from 529s must be made to pay or reimburse qualified higher education expenses incurred within the same calendar year. So if a loan was taken out in the spring to pay for college expenses, and the 529 withdrawal was made in the fall for the same amount as the original expenses, that would be allowed. What’s not allowed are 529 withdrawals to pay for prior year expenses, so if the loan was made in the prior year it could not be paid for by the 529 this year. </p>
<p>The penalty for non-qualified 529 withdrawals is 10% of the amount plus taxes on the profits (if any), so it’s possible that this would be worth doing anyway if it’s the only way to pay down a loan.</p>
<p>Note that the penalty and tax is only on the EARNINGS portion of a 529 withdrawal that is not used for “qualified educational expenses” - see earlier threads on 529s.</p>