529 Withdrawal Penalty

In this economy, we have seen many people are liquidating their 529 savings accounts to pay the expenses of daily life. This can certainly be heart-broken, but fortunately it is fairly easy to make and the tax implications and penalties may not be as bad as you think they will.

The flexibility of 529 plans

529 education savings plans have been designed to allow you some control. Because for many years of saving are affected by these plans, financial and personal situations can, and often change, sometimes dramatically. What makes the plan flexible is that you can withdraw at any time for any reason and without justification needed. You can ask all of your capital (the money you contributed) Return without penalties or taxes.

The penalties and taxes

Only profits and your contributions are subject to a 10% penalty imposed by the federal government. Similarly, these profits are subject to regular / ordinary income tax. You will receive a standard form for the 1099 tax year in which you withdraw the money. To avoid paying taxes in one year, try to take the money you need - to avoid a lump sum payment. This is especially important if this extra "income" can put you in a higher tax bracket. It also allows the balance to continue to make money. And who knows, maybe you do not need to eventually remove the entire balance.

Other possible penalties

If you took a deduction for state income tax on your 529 contributions, your state may be entitled to recover the money. Therefore, you must pay taxes on past contributions and taxes on profits. It is recommended to go back in your tax returns to see if you have the cash cushion you contributed to the plan. Refer to your plan to see if this withdrawal for unapproved expenditures is subject to other penalties. Each 529 savings plan is different. In addition, if you bought your 529 from a dealer full service, check for sanctions questioning.

The good

I conclude with the most upside for you. If your plan of 529, like many others, has taken a hit because of the bad economy, which ironically will be for you. If your balance is close to or below your total contributions, you pay very little or no penalties or tax at all. Keep your account open 529 even with only a few dollars in it. As your financial situation improves, the account will be ready for you to start adding again.