IRS Data: Families Paid Just $464 On Average In 529 Plan Penalties

New IRS data shows that terrible 529 plan punishment is much less common and much less painful than most families fear.

According to IRS income statistics division line item estimates for tax year 2023 (the most recent year with available data, released in June 2026) only 165,152 tax returns paid the additional 10% tax on nonqualified distributions from 529 plans and education savings accounts, totaling $76.6 million. That works out to an average penalty of about $464 per return for people who report 529 plan distributions.

Of the more than 160 million individual returns filed for 2023, approximately 0.1% paid this penalty at all.

Why is it important?

Fear of 529 plan penalty is one of the biggest reasons families hesitate to open a 529 plan account. What if my child doesn’t go to college? What if they get a scholarship? What if we save too much?

Data shows that those worst-case scenarios rarely translate into large fines. The additional 10% tax applies only to the earnings portion of the non-qualified withdrawal, never to the contributions. So even full-earner families usually owe much less than they expect.

With the numbers

Here is the data from Form 5329, Part II (the part where taxpayers report additional taxes on education accounts) for the 2023 tax year:

• 231,622 returns the reported taxable income of a withdrawal account for unqualified educationa total of $913.8 million. Everyone in this group owed ordinary income tax on that income.
• About 165,000 of them are returning he also paid the penalty of 10% of the total amount 76.6 million dollars – an average of approx $464 per return.

Why the gap? Earnings income tax always applies to non-qualified withdrawals, but the 10% penalty is waived when an exception applies. About a quarter of families that reported taxable income avoided the penalty in this way.

The most common exception to paying the fine is receiving a scholarship. When a beneficiary receives tax-free educational assistance, the corresponding amount can be withdrawn without penalty. Death, disability and attendance at the US Military Academy also qualify.

Note: The IRS combines 529 plans, Coverdell ESAsand ABLE accounts along these lines, but 529 plans have the vast majority of education savings funds. The numbers also slightly understate the total because filers without exception can report the penalty directly on Schedule 2 without filing a Form 5329.

How does this connect

The penalty has become even easier to avoid in recent years. Qualifying expenses now extend well beyond tuitioncovering K-12 tuition, student loan repayment up to $10,000 per beneficiary, and trade schools, apprenticeships and professional licenses. Remaining funds can be rolled over to a Roth IRA, rolled over to another family memberor simply stay invested for a future grandchild.

Even honest mistakes are corrected. Retiring families can too to pay the funds again within 60 days or apply the money to other qualified expenses in the same calendar year.

The 529 penalty is real, but not a misdemeanor. In 2023, the most recent year with data from the IRS, fewer than 1 in 1,000 tax filers paid it, and the average hit was under $500.

Families who skip tax-free growth in a 529 plan for fear of penalties are giving up a lot to avoid a risk that rarely materializes and, when it does, costs less than a semester’s worth of textbooks.

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