This article explains what we think are the six most important things to know about 529 withdrawals. Here goes.
Point No. 1: You Usually Have Several Payment Options
Say you are the 529 account owner or plan participant. Plans commonly use both terms to describe the person who established and controls the account. In this article, we will use account owner.
As the account owner, you can generally have a withdrawal check cut in your own name or have an electronic deposit made into your own account.
Alternatively, you can have a withdrawal issued in the name of the account beneficiary (the college student for whom you set up the 529 account, usually a child or grandchild) or issued directly to the educational ... Log in to view full article.
A 529 plan, also called a Qualified Tuition Program, is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary.
are not taxed at the federal level—as long as you understand and follow all the rules for qualifying expenses. You'll have to report your 529 plan spending to the IRS, so keeping careful records is important. Decide ahead of time how you'll withdraw the funds and use them.
Withdrawals that are not used for qualified expenses may be subject to federal and state income taxes. In most cases, the “earnings” portion of the withdrawal will be taxable as ordinary income and subject to a 10% federal income tax penalty.
Contributions to a 529 are after-tax and not federally tax deductible. However, if you invest in your own state's 529 plan or if your state is a "tax parity state," you may benefit from state income tax deductions on contributions or state tax exemptions on withdrawals.
It sounds like TurboTax (TT) is allocating some of the tuition to the Education Credit, reducing the amount that is allocated to the 529 distribution. If you are eligible for the education credit, you want TT to do that.
A Non-Qualified Distribution is any distribution that is not a Qualified Distribution. You may request a Non-Qualified Distribution at any time. However, the earnings portion of a Non-Qualified Distribution may be subject to a 10% federal income tax penalty in addition to any income taxes that may be due.
If you're paying for school expenses from a 529 plan or a Coverdell ESA, you will likely receive an IRS Form 1099-Q, which reports the total withdrawals you made during the year.
Then, at the end of December, the Department of Education revised the Free Application for Federal Student Aid (FAFSA), creating the so-called grandparent loophole. The grandparent loophole allows grandparents to use a 529 plan to fund a grandchild's education without affecting the student's financial aid eligibility.
If the distribution exceeds the qualified education expenses, the part of the distribution not used for qualified expenses will be taxable. The entire distribution will not be subject to tax, but a percentage of the earnings may be.
Note that there is no federal income tax deduction on 529 plan contributions. State tax benefits: Most states with an income tax allow either a deduction from income or a state tax credit for 529 plan contributions when reporting income for state tax purposes.
Unlike an IRA, contributions to a 529 plan are not deductible and do not have to be reported on federal income tax returns. What's more, the investment earnings in your account are not reportable until the year they are withdrawn. 529 plans save taxpayers billions of dollars on their income taxes.
There are advantages of 529 plans and one may be suitable for your family's needs. Earnings are not subject to federal tax when used for eligible college expenses. Earnings are often not subject to state tax. States may offer other incentives to in-state participants.
Recently we have seen audit activity by the IRS focusing on redemptions from 529 college savings plans. This is a bit surprising given the fact that 529 plans are relatively new.
Tax-favored Section 529 college savings plans — also known as qualified tuition programs — have been around long enough that many people are now withdrawing money to pay for school. Qualified withdrawals are always federal-income-tax-free and usually state-income-tax-free, too.
If possible, avoid making the distribution payable to the account owner. When 529 plan distributions are payable to the beneficiary, the beneficiary's college, or K-12 school, a Form 1099-Q will be issued to the beneficiary. Non-qualified distributions payable to a parent may result in a higher tax liability.
If your child does not receive a scholarship (or meet the requirements for one of the other exceptions) and you withdraw funds that you don't use for qualified education expenses, you will owe both taxes and a 10% penalty on the earnings.
Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.
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