529 plans use LIFO (Last In, First Out) ordering for withdrawals, not FIFO

When you withdraw money from a 529 plan, the IRS treats it as if you're taking out your most recent contributions first, then earnings, then earlier contributions. This is called LIFO ordering. It matters because withdrawals that come from earnings are taxed and penalized if used for non-may have access to expenses, while withdrawals from your contributions are never taxed — you already paid tax on that money when you earned it.

The practical effect: if you put $10,000 in a 529 last year and it grew to $12,000, then you withdraw $5,000 today, the IRS assumes you're pulling out $2,000 of earnings and $3,000 of your original contribution. The $2,000 in earnings gets taxed as income to the beneficiary, plus a 10 percent penalty, if the money doesn't go toward may have access to education expenses.

This is different from how some other investment accounts work. A regular brokerage account often lets you choose FIFO (First In, First Out) or specific identification. A 529 does not give you that choice — LIFO is the rule.

Key Takeaways

  • 529 plans use LIFO ordering, meaning the IRS treats your most recent deposits as the first money out when you make a withdrawal.
  • Contributions you made come out before earnings, so your own money is never taxed when withdrawn, regardless of how it's used.
  • Earnings that come out are taxed as income to the beneficiary plus a 10 percent penalty if spent on non-may have access to expenses like room and board at a non-accredited school.
  • You cannot choose FIFO or specific identification in a 529 plan — LIFO is mandatory under federal tax rules.
  • If you have multiple 529 accounts for the same beneficiary, LIFO applies across all of them together, not to each account separately.

Why the IRS chose LIFO for 529 plans

The LIFO rule exists to discourage people from using 529 plans for purposes other than education. If you could choose which money to withdraw, you could pull out only your contributions and leave the earnings untouched — avoiding tax and penalty on the growth. LIFO forces you to take earnings out first (in the order they were added), which means you face tax and penalty if you spend that money on anything other than may have access to education costs.

This structure encourages account owners to use 529 money only for education, because taking out earnings for other purposes costs real money in taxes and penalties. It's the IRS's way of protecting the tax-advantaged status of the account.

What counts as a may have access to education expense

may have access to expenses include tuition, fees, books, supplies, and equipment required by the school. Room and board is may have access to if the student is at least a half-time student. Computers and internet access are may have access to. Student loan repayment — up to $35,000 lifetime per beneficiary — is also may have access to as of 2024.

Expenses that are not may have access to include room and board at a school that is not accredited, transportation, insurance, and personal expenses. If you withdraw earnings and spend them on non-may have access to items, those earnings are taxed as ordinary income to the beneficiary, plus a 10 percent penalty.

How LIFO works across multiple 529 accounts

If you have opened more than one 529 account for the same beneficiary — say, one through your state and one through a broker — the LIFO rule applies to all of them together, not separately. The IRS treats them as a single pool of money for ordering purposes.

This means if you have $20,000 in contributions and $5,000 in earnings across all your accounts combined, and you withdraw $8,000, the IRS assumes you're taking $5,000 of earnings first, then $3,000 of contributions. The $5,000 in earnings is subject to tax and penalty if not used for may have access to expenses, even if you withdrew it from the account with the lowest earnings.

You do not need to coordinate the accounts yourself — the IRS straightforward applies the rule when you report the withdrawal on your tax return. But you should track your total contributions and earnings across all accounts so you know what portion of each withdrawal is taxable.

What happens if you withdraw earnings for non-may have access to expenses

When earnings come out of a 529 and are not used for may have access to education expenses, two things happen: the earnings are taxed as ordinary income to the beneficiary, and a 10 percent penalty applies to those earnings only. Your contributions are never penalized or taxed, no matter what you do with them.

The tax is owed by the beneficiary (the student), not by you as the account owner. If the beneficiary is a minor with little other income, the tax may be small. If the beneficiary is an adult with a job, the tax is added to their regular income tax bill for that year.

The 10 percent penalty is a separate cost on top of the income tax. So if $5,000 in earnings comes out and is not used for may have access to expenses, and the beneficiary is in the 22 percent tax bracket, they owe roughly $1,100 in income tax plus $500 in penalty — $1,600 total on that $5,000.

LIFO and rollovers to another beneficiary

If you change the beneficiary on a 529 account to another family member, the LIFO rule still applies. You can move money between family members without tax or penalty, but if you later withdraw it for non-may have access to expenses, the earnings portion is still subject to tax and penalty.

Rollovers to another beneficiary do not reset the LIFO clock. The earnings are still treated as earnings, and contributions are still treated as contributions, regardless of who the beneficiary is.

How to track contributions and earnings for tax purposes

Your 529 plan provider sends you a statement each year showing your contributions, the account's earnings, and the total value. Keep these statements. When you make a withdrawal, the provider will send you a Form 1099-Q, which reports the total amount withdrawn and how much of it is earnings.

You report this on your tax return using Form 5498-QTP (if you made contributions) and Form 1099-Q (for withdrawals). If the earnings portion was used for non-may have access to expenses, you report the earnings as income and add the 10 percent penalty on your return.

The easiest approach is to withdraw only what you need for may have access to expenses in a given year, and to keep your provider's annual statements in a folder. When you file taxes, you will have the numbers you need to report withdrawals accurately.

Frequently Asked Questions

Can I choose FIFO instead of LIFO for my 529 withdrawals?

No. The IRS requires all 529 plans to use LIFO ordering. You cannot opt into FIFO or specific identification, even if your plan provider offers those options for other accounts. LIFO is a federal tax rule that applies to every 529 plan.

Does LIFO explore if I withdraw money for a may have access to expense?

Yes, LIFO still applies, but it does not matter for tax purposes. When you withdraw money for a may have access to education expense, neither the contributions nor the earnings are taxed or penalized. LIFO determines which money comes out first, but the tax treatment is the same either way — no tax owed.

What if I withdraw more than the year's education expenses?

If you withdraw $15,000 but only spent $10,000 on may have access to expenses, the excess $5,000 is treated as a non-may have access to withdrawal. LIFO applies: the earnings portion of that $5,000 is taxed and penalized, while the contributions portion is not. You need to track what portion of the $5,000 is earnings versus contributions based on the LIFO rule.

Do I have to report LIFO on my tax return?

Your 529 provider reports the withdrawal on Form 1099-Q. You report it on your tax return using Form 5498-QTP and Form 1099-Q. If any earnings were used for non-may have access to expenses, you report those earnings as income and add the 10 percent penalty. The LIFO calculation is built into the Form 1099-Q, so you do not calculate it yourself.

If I have two 529 accounts, can I withdraw from one and leave the other alone?

You can physically withdraw from whichever account you choose, but LIFO applies across both accounts combined. The IRS does not care which account the money came from — it treats all your 529 accounts for the same beneficiary as one pool. If you have $10,000 in earnings total across both accounts and you withdraw $5,000, half of it is treated as earnings for tax purposes, regardless of which account you withdrew from.