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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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A father sets up a 529 account for his son under both of

Resolved Question:

A father sets up a '529' account for his son under both of their ssns. The son elects not to go to college. There are no other children so the father elects to withdraw the funds. The father is under age 59.5. Does the father pay tax on the earnings only & does he also pay a 10% early withdraw penalty?
Submitted: 12 months ago.
Category: Tax
Expert:  Lane replied 12 months ago.

NPVAdvisor :

Yes, taxes on the earnings as well as a 10% penalty

NPVAdvisor :

You CAN use them for another educational beneficiary

NPVAdvisor :

Doesn't have to be your child

NPVAdvisor :

Here's an excellent article, along with links to several others, all relating to the use of 529 plans: http://www.savingforcollege.com/articles/avoid-these-529-withdrawal-traps?page=3

NPVAdvisor :

Hope this helps

NPVAdvisor :

Lane

NPVAdvisor :

(let me know if you have any questions at all)

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3861
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 12 months ago.
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Expert:  Lane replied 12 months ago.



Hi Scott,

Thanks so much.

Just to make sure I was clear, it IS ONLY the earnings that are taxed and penalized.



In the interest of clarity, I found this excellent description:

If you use the money for any other purpose, the earnings portion of the distribution will be taxable on your federal (and possibly state) income tax return in the year of the distribution. Also, you generally must pay a 10 percent federal penalty on the earnings portion of your distribution. (There are a couple of exceptions. The penalty is usually not charged if you terminate the account because your beneficiary has died or become disabled, or if you withdraw funds not needed for college because your beneficiary has received a scholarship.)

Bear in mind that the "distributee" is the one subject to tax. (The distributee is the person who actually receives the money from the 529 plan.) In most situations, this will be the account owner. So, if you fund a college savings plan for your son, for example, and withdraw the money three years later (before he reaches college age), you will probably be the one taxed and penalized. However, some plans specify who the distributee is, while others allow the account owner to determine the recipient of a nonqualified withdrawal.


Here's an other excellent site with common Q&A on 529 plans:

http://www.axa-equitable.com/plan/education/529-plans/non-education-expenses.html


Thanks again,
Lane

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