If the earnings from the 529 plan are withdrawn and not used for qualified education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. When applicable, the penalty is computed on Form 5329. Before becoming concerned, remember, had the taxpayer not utilized the tax deferral benefits of the Sec 529 plan, they would have accumulated significantly less in the account that may more than offset the 10% penalty.  Penalties can be avoided by making a tax and penalty-free rollover from one 529 plan to another, and remember, a taxpayer can change beneficiaries to a 529 plan without penalty.