HV Ken Posted April 1, 2014 Report Share Posted April 1, 2014 Client pulled out their entire 529 plan, none of the money was used for education expenses, and no other exceptions apply. I understand this is taxable and there is a 10% penalty. I am just looking to confirm that it is only the earnings portion of the distribution that is taxed and penalized, which is my understanding. Thanks! Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted April 2, 2014 Report Share Posted April 2, 2014 Federal law imposes a 10% penalty on earnings for non-qualified distributions. The penalty is not assessed on principal. (Distributions are allocated between principal and earnings on a pro-rata basis.) An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship. What sometimes is worse than the penalty is the fact that the earnings portion will be subject to tax as ordinary income at your client's tax rate. The principal is not taxed because the contributions were with after-tax dollars. Quote Link to comment Share on other sites More sharing options...
HV Ken Posted April 2, 2014 Author Report Share Posted April 2, 2014 Yup - that's what I had. Thanks for the confirmation. Quote Link to comment Share on other sites More sharing options...
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