Do 529 plan earnings grow tax-free, and what happens if I withdraw for a non-qualified reason?

Yes. Money inside a 529 grows federal-income-tax-free, and withdrawals are completely tax-free when used for qualified education expenses, per IRS rules. If you take a non-qualified withdrawal, only the earnings portion is taxed as ordinary income, and that portion also faces a 10% federal penalty; your original contributions always come out tax- and penalty-free since they were made with after-tax dollars. Some states may also recapture any prior state tax deduction you claimed. The penalty is waived in specific cases such as the beneficiary receiving a scholarship, attending a U.S. service academy, or becoming disabled. Before pulling non-qualified money, check whether a beneficiary change or a 529-to-Roth rollover would preserve the tax benefit instead.