Liquidating Safely: How to Withdraw Your Child’s Savings Without Costly Mistakes

If your child started college this fall, here’s a deadline that catches many families off guard. A 529 withdrawal to cover tuition you paid in 2026 has to come out of the account by December 31, 2026. The IRS matches 529 withdrawals to expenses by calendar year, not by school year, as Saving for College’s guide to 529 withdrawals explains. Take the money in January instead, and a withdrawal that should have been tax-free may not count as qualified, which means income tax and a 10% penalty on its earnings.

That rule is one of several traps in the final stretch of saving for a child. After years of building the money, the last phase is about getting it out safely: moving next year’s money out of the market in time, taking withdrawals in an order that keeps taxes and financial aid in check, and handing over a custodial account when the law says it belongs to your child. This guide walks through each step. For how the accounts compare before you reach this point, see Comparing Investment Accounts for Kids: 529 vs. UTMA vs. Roth IRA vs. 530A.

Move next year’s money out of the market

The biggest risk in the final years isn’t a bad investment. It’s a bad year at the wrong time. The average published price of a year at a public four-year college for an in-state student was $25,850 in 2025-26: $11,950 for tuition and fees plus $13,900 for housing and food, according to the College Board’s Trends in College Pricing and Student Aid 2025.

Imagine that year’s money had been sitting in an S&P 500 index fund at the start of 2008. The index lost 36.55% in 2008, counting dividends, according to annual return data kept by NYU finance professor Aswath Damodaran. The $25,850 would have shrunk to about $16,402, a $9,448 shortfall, and the tuition bill wouldn’t have shrunk with it.

Bonds aren’t automatically the fix. Ten-year Treasury bonds gained 20.10% in 2008 but lost 17.83% in 2022, when rising interest rates knocked down stocks and bonds at the same time. Only three-month Treasury bills, a stand-in for cash, gained in both years.

• Stocks (S&P 500)
• 10-year Treasury bonds
• 3-month Treasury bills
• The $25,850 you started with

Each bar applies that year’s total return, from Aswath Damodaran’s data, to the College Board’s $25,850 average published price for a year of in-state tuition, fees, housing, and food at a public four-year college in 2025-26. The S&P 500 return includes dividends. Past returns don’t predict future ones.

See the numbers

One year of college money in three investments

Investment	Return	Value after a year
2008
Stocks (S&P 500)	−36.55%	$16,402
10-year Treasury bonds	+20.10%	$31,046
3-month Treasury bills	+1.40%	$26,212
2022
Stocks (S&P 500)	−18.04%	$21,187
10-year Treasury bonds	−17.83%	$21,241
3-month Treasury bills	+2.09%	$26,390

For a toddler’s account, a year like 2008 is a setback with plenty of time to recover. For money due next August, it’s a loss you have to cover some other way, whether with loans, extra work, or a cheaper school. That’s why each year’s college money should leave the stock market well before its bill arrives.

A simple bucket plan

One way to lower the risk without guessing about markets is to sort the money by when you’ll spend it. The exact mix depends on your plan’s options and your comfort with risk, but the shape looks like this:

• Money for the next 12 months. Cash equivalents, such as a savings account, a money market fund, Treasury bills, or the most conservative option in your 529 plan. Check what that option actually holds, since the names vary from plan to plan.
• Money for one to three years out. Mostly short-term bonds and cash, with little or no stock. Short-term bonds swing less than 10-year bonds when interest rates move, though they can still dip.
• Money for later years. A balanced mix that steps down each year as its bill gets closer.

If your 529 uses an age-based or enrollment-year portfolio, it may already be making some of these moves for you. Check how much of it is still in stocks as college approaches, and adjust if that’s more risk than you want. Building a Target-Date Glide Path covers the years leading up to this stage, and The Role of Bonds and Fixed Income explains how different bonds behave.

Plan your moves inside a 529 ahead of time, because they’re limited. You can change how money already in a 529 is invested only twice per calendar year, plus when you change the beneficiary, according to Saving for College. The limit applies only to money already in the account. New contributions can always go into a different option, which makes them an easy way to fill the cash bucket.

Cash equivalents have their own small print. Most money market funds try to keep a stable share price of $1.00, but they aren’t FDIC-insured, and in rare cases a fund has “broken the buck” and fallen below $1.00, the SEC’s Investor.gov warns. Their low yields can also trail inflation. In 2022, Treasury bills returned 2.09% while inflation ran at 6.45%. For money you’ll spend within a year, though, giving up some growth is a fair price for knowing the money will be there.

How to withdraw from a 529 plan

A 529 withdrawal is tax-free when it matches qualified education expenses. When it doesn’t, the earnings portion of the mismatch is taxed as income, plus a 10% penalty. The Complete Guide to 529 College Savings Plans covers how the accounts work. Here’s what matters once the bills arrive.

Match withdrawals to the calendar year

A withdrawal is qualified only if it matches expenses paid in the same calendar year. Semesters don’t matter, which trips families up in two common ways:

• The January withdrawal for a December bill. If you pay the spring bill in December 2026 and take the 529 money in January 2027, the withdrawal may not count as qualified, because the expense belongs to 2026. Take it by December 31 instead.
• The forgotten reimbursement. If you paid the fall bill from savings in August and meant to reimburse yourself, you can still take a catch-up withdrawal any time before the year ends.

Your plan needs time to process each request, so don’t leave it to the last week of December. A simple habit helps: each fall, add up the year’s qualified expenses, compare the total with what the 529 has paid out, and close any gap before the year ends.

Know what counts as a qualified expense

For college, qualified expenses include:

• Tuition and required fees.
• Books, supplies, and equipment the courses require, plus computers and internet access.
• Room and board for a student enrolled at least half-time. On campus, that’s the actual housing charge. Off campus, it’s capped at the school’s published cost-of-attendance allowance, even if the rent is higher.

Some common costs don’t qualify, including application fees, transportation, health insurance, and sports or club fees. Paying them from a 529 makes that part of the withdrawal non-qualified.

The list has grown. A 529 can now pay up to $20,000 a year of K-12 tuition and related costs, up from $10,000 before 2026. It can also repay up to $10,000 of student loans per person over a lifetime, and pay for credentialing and licensing programs, for withdrawals made after July 4, 2025. Keep tuition bills, receipts, and proof of enrollment for at least three years after you file, in case the IRS asks you to back up a withdrawal.

Choose who gets the money

Most plans let the account owner decide where a withdrawal goes: to the owner, to the student, or straight to the school. Saving for College suggests avoiding payment to the account owner when you can. When the money goes to the student or the school, the Form 1099-Q goes to the student, and a non-qualified withdrawal paid to a parent may lead to a higher tax bill.

If you have more than one 529 for the same child, draw first from the account with the highest share of earnings. That leaves the slowest-growing account for last, so any money left over carries less taxable growth. If relatives own 529s for your child too, agree on who pays which bills so the withdrawals don’t overlap.

Fixes for common snags

• You took out too much. Roll the excess into a 529 within 60 days, or use it to prepay qualified expenses for the next term before the calendar year ends.
• The school sent a refund. If your child drops a class or leaves mid-semester and the school refunds expenses the 529 paid, the refund isn’t taxed if you put it back into a 529 for the same student within 60 days, up to the amount refunded, under IRS Notice 2018-58.
• Your child won a scholarship. You can withdraw up to the amount of a tax-free scholarship without the 10% penalty, though the earnings are still taxed. The penalty is also waived if your child attends a U.S. military academy, and in cases of death or disability.
• Money is left over after graduation. You can save it for graduate school, use it toward student loans within the lifetime limit, change the beneficiary to another family member, such as a younger sibling who can now use up to $20,000 a year for K-12 tuition, or roll some into your child’s Roth IRA. The SECURE 2.0 Act: Rolling 529 Funds into a Roth IRA explains the rollover rules.

Which account to tap first

Most families pay for college from more than one pot: a 529, a custodial account, savings, current income, and sometimes a Roth IRA. The order matters, because each pot has its own tax rules and counts differently for financial aid. There’s no single right sequence, but this one works for many families:

Treat the order as a starting point and bend it around your own accounts. If your income is too high for the tax credit, for example, the first step drops away and the 529 can go first. Comparing Investment Accounts for Kids explains how each of these accounts works.

Claim the tax credit first

The American Opportunity Tax Credit is worth up to $2,500 per student per year: 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, according to the IRS. So $4,000 of expenses earns the full credit. If the credit brings your tax to zero, 40% of what’s left of it, up to $1,000, is refunded to you. You can claim it for four years per student. The full credit is available with modified adjusted gross income of $80,000 or less ($160,000 or less for married couples filing jointly), and it shrinks between $80,000 and $90,000 ($160,000 and $180,000 for joint filers) before disappearing.

The IRS’s comparison of the education credits spells out the details that matter here. The student must be pursuing a degree or other recognized credential and be enrolled at least half-time for at least one academic period during the year. Tuition and enrollment fees count, and so do course materials the student needs, even if you don’t buy them from the school. The expenses can be paid by you, your spouse, a dependent you claim on your return, or a third party, so tuition paid from your child’s custodial account can still count toward your credit.

The catch is that the same expenses can’t count twice. Costs covered by a tax-free 529 withdrawal or a tax-free scholarship can’t also earn the credit. Saving for College gives an example: with $10,000 of qualified expenses, $4,000 used for the credit, and a $2,000 tax-free scholarship, only $4,000 can come out of the 529 tax-free. That’s why a common strategy is to pay the first $4,000 of tuition, fees, and course materials each year from savings, income, or your child’s custodial account, and to use the 529 for the rest.

If you expect need-based aid

Aid formulas treat accounts very differently. On the FAFSA, money your child owns, including a custodial account, counts as a student asset assessed at 20% of its value. A 529 owned by a parent, or a custodial 529, counts as a parent asset assessed at no more than 5.64%, according to Saving for College. So $10,000 in a custodial account can add $2,000 to the Student Aid Index, while the same $10,000 in a parent-owned 529 adds no more than $564. How 529s and UTMAs Impact the FAFSA covers the formulas in depth.

For families who expect to qualify, that points to a few moves:

• Spend custodial money early. Using it for first-year costs that benefit your child, like the first $4,000 of tuition, shrinks the student asset before the next FAFSA.
• Or move it into a custodial 529. Selling custodial investments and putting the cash into a custodial 529 turns a student asset into a parent asset on the FAFSA. The sale can create capital gains taxed to your child, though, and once the money is in the 529, the custodian can withdraw it only for your child’s education.
• Know what grandparents’ 529s do. Withdrawals from a grandparent-owned 529 no longer count as your child’s income on the FAFSA, though the CSS Profile, the aid form some colleges use in addition to the FAFSA, may still count them.

Roth IRAs and Trump Accounts come last

Retirement-style accounts usually belong at the end of the line. Money left in a Roth IRA can keep growing tax-free for decades, and withdrawals can hurt financial aid. The FAFSA counts the full amount taken from a Roth IRA as income, even the part that’s a tax-free return of contributions, according to Saving for College.

Timing can take the sting out. The FAFSA looks at income from two years earlier, so for a student who finishes college in four years, withdrawals made on or after January 1 of their sophomore year of college never show up on a FAFSA. Neither do withdrawals made before January 1 of their sophomore year of high school. The Custodial Roth IRA covers the tax rules for withdrawals from a teen’s own Roth.

A Trump Account has its own clock. Under IRS Notice 2025-68, its growth period ends on January 1 of the year your child turns 18, and withdrawals generally aren’t allowed before then. After that, withdrawals follow traditional IRA rules: the part of each withdrawal that represents after-tax contributions comes back tax-free, the rest is taxed as ordinary income, and the 10% additional tax on early withdrawals doesn’t apply to money spent on qualified higher education expenses. Because every dollar left in the account can keep growing for retirement, most families will want to tap it last, if at all, for college. The 530A Trump Account Explained has the details.

Selling investments in a custodial account

A custodial account under the UTMA or UGMA is your child’s money with you as the manager. You can spend it on your child’s behalf before the handoff, but two rules shape how. UTMA vs. UGMA: What’s the Difference? covers the custodian’s role in full.

First, spending must benefit your child, and it can’t stand in for your own duty to support them. Custodial money can generally pay for college. But under a long-standing IRS ruling, Rev. Rul. 56-484, income from custodial property that’s used to meet a parent’s legal support obligation is taxed to that parent. In most states, paying for college isn’t part of that obligation, but state law or a divorce decree can make it one, according to a case study in The Tax Adviser. If a divorce settlement assigns college costs to a parent, ask a tax professional before using the custodial account to pay them. Protecting Assets in the Event of Divorce covers custodial accounts when parents separate.

Second, selling creates a tax bill in your child’s name, and while your child is a dependent student, the kiddie tax can push much of it onto your tax rate.

How the kiddie tax changes the math

For 2026, the first $1,350 of a child’s investment income is tax-free, the next $1,350 is taxed at the child’s own rate, and income above $2,700 can be taxed at the parents’ rate, based on the figures in Revenue Procedure 2025-32. Capital gains count as investment income, so selling a big winner can easily cross that line.

The rule doesn’t stop at 18. According to the instructions for Form 8615, it can apply when investment income is over $2,700 and the child is under 18, is 18 with earned income of no more than half their own support, or is a full-time student aged 19 to 23 with earned income of no more than half their support. A student counts as full-time if they were enrolled full time during some part of each of five calendar months of the year, under the instructions for Form 8814, so a student who graduates in May has usually met that test for the year.

Here’s what that can mean for the same $10,000 long-term gain, sold in two different years:

Assumes 2026 federal rules, investments held more than a year, and no other investment income. At 20, your child is a full-time student with no earnings, and you file jointly with taxable income between $98,900 and $613,700, where long-term gains are taxed at 15%. At 23, your child earns $40,000 and pays their own way, so the kiddie tax no longer applies: $40,000 of wages minus the $16,100 standard deduction leaves $23,900 of taxable income, and the gain brings it to $33,900, under the $49,450 limit for the 0% rate. State taxes aren’t included.

At 20, $7,300 of the gain is taxed at the parents’ 15% rate, for $1,095 of federal tax. At 23, working and paying their own way, your child is past the kiddie tax, and the whole gain fits inside the 0% capital gains bracket, which for 2026 covers taxable income up to $49,450 for a single filer. Your family’s numbers will differ, but the timing lesson carries over. A few habits help:

• Sell in pieces. Spreading sales over several years keeps more of each year’s gain in the lower tiers.
• Pair gains with losses. Selling an investment that has lost value in the same year offsets part of the gain.
• Sell only what college needs. If some of the money isn’t needed for school, selling it after your child is out of school and supporting themselves may cost far less.
• Remember the handoff. Once the account passes to your child, when to sell becomes their decision.

Navigating the 2026 Kiddie Tax Thresholds covers the tiers and the forms in detail.

The handoff: what happens at 18, 21, or 25

Money in a custodial account is an irrevocable gift. When your child reaches the age set for the account, the custodianship ends and the money is legally theirs to manage, spend, or save, whatever you think of their plans. What Happens at the Age of Majority? covers the legal side.

That age is the account’s termination age, and it isn’t always the age of majority. Many states let the person who opens the account choose an age within a range, such as 18 to 21 or 21 to 25, and Wyoming allows up to 30, according to Saving for College. So your child may be a legal adult for years before the account is theirs. If you don’t know your account’s termination age, ask the firm that holds it.

What the transfer looks like

Firms handle the switch differently, but each one ends with the account in your child’s name:

• Fidelity notifies the custodian when it’s time and says the account must be transferred within a set time frame once the child reaches the state’s termination age, which is between 18 and 25 depending on the state. If it isn’t, the account is restricted, according to Fidelity.
• Schwab restricts the account on the beneficiary’s birthday until it hears from them, and checks, MoneyLink transfers, and other automatic payments stop. If there are no instructions after 90 days, Schwab re-registers the account in the beneficiary’s name, still restricted until they send the right forms, according to Schwab. It won’t accept forms signed before the eligible age.

From there, your child usually has three choices: keep the account at the same firm in their own name, move it to another firm, or close it and take a check. Schwab notes that closing the account can mean capital gains tax, since the investments are sold. A custodial Roth IRA gets re-registered in your child’s name too. Simply re-registering doesn’t sell anything, so the handoff itself doesn’t create a tax bill.

The paperwork is the easy part. The harder part is making sure a young adult is ready for the money. The “Wealth Transfer” Conversation has a script for that talk, and Using Custodial Funds for Life Starts covers goals like a first car or a down payment. Until then, Naming Successor Custodians explains why every custodial account needs a backup manager.

Other accounts run on different clocks

Not every account hands over, and the ones that do don’t all work the same way:

The first row surprises many parents. The owner of a regular 529 keeps control for the life of the account, and the beneficiary has no legal rights to it, according to Saving for College. So if your child doesn’t need the money, you decide what happens to it. A custodial 529 works the other way: your child becomes the owner at the state’s custodial age, though the money still has to go to education to stay tax-free.

A countdown for the final stretch

Here’s the whole final phase as a checklist, counting down to the first tuition bill and beyond:

• Five years out. Start moving the first year’s money toward short-term bonds and cash, and check what your 529’s age-based option, if you use one, is already doing.
• Three to four years out. Decide which account will pay for what, and estimate whether you’re likely to qualify for need-based aid.
• January of sophomore year of high school. The first FAFSA will look at income from this calendar year on, so think twice about income spikes, like large Roth IRA withdrawals or big capital gains, from here on.
• Senior year of high school. Have the first year’s money in cash equivalents, file the FAFSA, and learn how your plan’s withdrawal requests work.
• Every semester. Pay the bill, take the matching 529 withdrawal in the same calendar year, and file the receipts.
• Every December. Compare the year’s 529 withdrawals with qualified expenses, take any catch-up withdrawal before December 31, and confirm you paid at least $4,000 from outside the 529 if you’re claiming the credit.
• A year before the handoff. Confirm the custodial account’s termination age with the firm, decide what it should still pay for, and walk your child through what they’ll inherit.

If family members want to help in these last years, GoodNest can collect their gifts for graduations, birthdays, and other milestones. Guests give from your child’s GoodNest page and send the money straight to you by Zelle, Venmo, or PayPal. GoodNest never holds or invests it, so you decide where it goes. In the final stretch, that usually means the cash bucket: a graduation gift can go straight toward the first tuition bill instead of into the market. Structuring Milestone Contributions has ideas for graduations and other big moments.

The bottom line

Liquidating safely is mostly about timing. Move each year’s money out of the market well before its bill. Take 529 withdrawals in the same calendar year as the expenses they cover, and leave the first $4,000 of each year’s tuition to other money if you can claim the credit. Spend custodial money with the kiddie tax and financial aid in mind, and save Roth IRAs and Trump Accounts for last. Then, when the custodial account’s termination age arrives, hand it over with a plan your child helped make.

None of this requires predicting the market. It takes a calendar and a little paperwork. For a refresher on how each account works, see Comparing Investment Accounts for Kids.

Frequently asked questions

When should I move college savings to cash?

Money you’ll spend within about a year belongs in cash equivalents, such as a savings account, a money market fund, Treasury bills, or your 529’s most conservative option. A common approach is to start shifting each year’s money about five years before it’s needed and to have it in cash a year ahead. The risk is real: in 2008, the S&P 500 lost 36.55%, which would have turned a $25,850 year of college into about $16,402.

Can I take a 529 withdrawal in January for a bill I paid in December?

It’s risky. A 529 withdrawal is qualified only if it matches expenses paid in the same calendar year, so a January withdrawal for a December bill may be treated as non-qualified, with income tax and a 10% penalty on its earnings. Take the withdrawal by December 31 of the year you pay the bill, and leave time for your plan to process it.

Should I use the 529 or the custodial account first?

Often the custodial account, at least for the first $4,000 of tuition, fees, and course materials each year. Paying those costs with money from outside the 529 lets you claim the American Opportunity Tax Credit of up to $2,500 if your income qualifies, and spending custodial money early can help with financial aid, since the FAFSA assesses it at 20%, compared with no more than 5.64% for a parent-owned 529. Watch the kiddie tax when you sell, and use custodial money only for costs that aren’t part of your own duty to support your child.

Can I keep my child from getting the custodial account?

No. Money in a custodial account already belongs to your child, and when the custodianship ends at the termination age set for the account, the firm moves it into their name. Fidelity lets a custodian move the assets into a trust once the child is an adult, but only with a letter signed by both the custodian and the child, so it takes your child’s agreement. Money you want to keep control of belongs in an account you own, like a parent-owned 529.

Does transferring a custodial account to my child create a tax bill?

Not by itself. The money has been your child’s all along, so moving the account into their name isn’t a sale. Taxes come into play when investments are sold. Schwab notes, for example, that a beneficiary who closes the account and takes a check may owe capital gains tax.

Sources

• Jeffrey Trull, Saving for College, “529 Plan Withdrawal Rules: How to Take Tax-Free Distributions & Avoid Penalties” (updated July 31, 2026).
• College Board, “Trends in College Pricing and Student Aid 2025” (November 2025).
• Aswath Damodaran, NYU Stern School of Business, historical annual returns on stocks, Treasury bonds, and Treasury bills since 1928 (data page, accessed October 2, 2026).
• Saving for College, “How Many 529 Plan Investment Changes Can You Make Per Year?” (accessed October 2, 2026).
• U.S. Securities and Exchange Commission, Investor.gov, “Money Market Funds” (accessed October 2, 2026).
• Internal Revenue Service, Notice 2018-58, guidance on section 529 plans (2018).
• Internal Revenue Service, “American Opportunity Tax Credit” (accessed October 2, 2026).
• Internal Revenue Service, “Education credits: AOTC and LLC” (page reviewed August 12, 2026).
• Kathryn Flynn, Saving for College, “What is a Custodial 529 Plan Account?” (updated August 6, 2026).
• Saving for College, “How do distributions from a Roth IRA affect the FAFSA?” (accessed October 2, 2026).
• Internal Revenue Service, Notice 2025-68, guidance on Trump Accounts (December 2025).
• The Tax Adviser, “Making Gifts to Minors” (case study edited by Albert B. Ellentuck, March 1, 2011).
• Internal Revenue Service, Revenue Procedure 2025-32, inflation adjustments for 2026 (2025).
• Internal Revenue Service, “Instructions for Form 8615 (2025)” (accessed October 2, 2026).
• Internal Revenue Service, “Instructions for Form 8814 (2025)” (accessed October 2, 2026).
• Kristen Kuchar, Saving for College, “What is a UGMA and UTMA Account?” (updated July 15, 2026).
• Fidelity Investments, “Transfer your UGMA/UTMA to the beneficiary” (accessed October 2, 2026).
• Charles Schwab, “Transferring a Custodial Account” (accessed October 2, 2026).

This article is for general educational purposes only and is not tax, legal, investment, or financial aid advice. Tax figures are for 2026 and change each year, and 529 plan rules, state custodial laws, and each firm’s transfer procedures vary, so confirm the details with your plan, your firm, or a tax professional. Past returns don’t predict future results, and investing involves risk, including possible loss of principal. GoodNest does not provide tax, legal, or investment advice and does not hold or invest funds.