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

New IRS data shows that the dreaded 529 plan penalty is far less common, and far less painful, than most families fear.

According to the IRS Statistics of Income division's line item estimates for tax year 2023 (the most recent year with data available, released in June 2026) just 165,152 tax returns paid the 10% additional tax on non-qualified 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 reporting 529 plan distributions.

Out of the more than 160 million individual returns filed for 2023, roughly 0.1% paid this penalty at all.

Why It Matters

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

The data shows those worst-case scenarios rarely turn into big penalties. The 10% additional tax only applies to the earnings portion of a non-qualified withdrawal, never the contributions. So even families who cash out entirely typically owe far less than they expect.

By The Numbers

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

• 231,622 returns reported taxable earnings from a non-qualified education account withdrawal, totaling $913.8 million. Everyone in this group owed ordinary income tax on those earnings.
• About 165,000 of those returns also paid the 10% penalty, totaling $76.6 million — an average of roughly $464 per return.

Why the gap? The income tax on earnings always applies to a non-qualified withdrawal, but the 10% penalty gets waived when an exception applies. Roughly a quarter of families reporting taxable earnings avoided the penalty this way.

The most common exception to paying the penalty is receivinga scholarship. When a beneficiary receives tax-free educational assistance, a matching amount can be withdrawn penalty-free. Death, disability, and attendance at a U.S. military academy also qualify.

Note: The IRS combines 529 plans, Coverdell ESAs, and ABLE accounts on this line, but 529 plans hold the overwhelming majority of education savings assets. The figures also slightly understate the total, since filers with no exception can report the penalty directly on Schedule 2 without filing Form 5329.

How This Connects

The penalty has become even easier to avoid in recent years. Qualified expenses now stretch well beyond tuition, covering K-12 tuition, student loan repayment up to $10,000 per beneficiary, and trade schools, apprenticeships, and professional licenses. Leftover funds can roll to a Roth IRA, transfer to another family member, or simply stay invested for a future grandchild.

Even honest mistakes are fixable. Families who withdraw too much can recontribute the funds within 60 days or apply the money to other qualified expenses in the same calendar year.

The 529 penalty is real, but it's not a dealbreaker. In 2023, the latest year with IRS data, fewer than 1 in 1,000 tax returns paid it, and the average hit was under $500.

Families skipping the tax-free growth of a 529 plan out of penalty fear 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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