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Non-Qualified 529 Expenses – Taxation and Penalties

Jun 5th, 2020
by sraskie.
2 comments

The intended purpose of 529 plans was to help individuals save for college education while receiving tax deferral of earnings and use of money tax- free for qualified expenses. However, sometimes money in the plan remains after paying for education expenses, a beneficiary decides not to go to college (and there no replacement beneficiary), or other events cause funds to be left unused. Plan owners have few options at this point, and one option may be to use money from the 529 plan for non-qualified expenses. Should this be the case, we need to look at how this money is handled. Generally, any money that’s taken from the plan for non-qualified expenses is taxed at the taxpayer’s ordinary income rates (marginal rates). Additionally, a 10% penalty is applied – like the 10% early withdrawal penalty on retirement funds. Furthermore, if the owners took at state income tax deduction for the […]