Education
|
Posted on August 8th, 2024
The college acceptance letters have come in, your child is excitedly picking out their majors and minors, you're planning to turn their room into a greenhouse for all your plant babies... it's an exciting time. With the help of your family and friends, you managed to save enough in your 529 plan to cover just about everything your child could need, but how the heck do you make a withdrawal?
529 withdrawals are tax free when used on unlimited qualified educational expenses, up to $10,000 per year on K-12 tuition, or up to $10,000 of student loan repayment. It's not difficult to make withdrawals from your plan, but there are a few steps to follow to make sure you're reaping all the benefits.
While you can withdraw any amount of money at any time, it's your money after all, if you're looking to take advantage of tax-free earnings, then you should only withdraw what you need to cover your Adjusted Qualified Educational Expenses (AQEE).
Using the numbers below as an example, you can see how this person could withdraw $4,000 tax-free:
Sometimes life happens and you need to use the funds for something other than the educational expenses you'd planned for. In this case, you can withdraw any amount at any time, but the earnings portion of your withdrawal will need to be reported on the account owner's or the beneficiary's federal tax returns depending on who the withdrawal distribution was paid to, as these earnings will be subject to income tax, like any other investment, and a 10% penalty. Your original contributions will not be taxed or penalized though. Remember, non-qualified withdrawals paid to a parent will likely be subject to more tax than those payable to the child.
529 plans were designed to help parents save effectively for college, the 10% penalty on non-qualified withdrawals is to help deter those who would abuse the system, simply using a 529 plan as a tax-haven with no intent to use them for college expenses.
While the earnings of all non-qualified withdrawals are subject to tax, as with any investment, there are instances where you won't be subject to the 10% penalty. This includes scholarships, attending a U.S. Military Academy, tax-free educational assistance, receipt of education tax credits, the return of excess funds that were previously withdrawn in error, death or disability.
(615) 517-2064 | 2020 Lindell Ave, Studio 10, Nashville, TN 37203
Raise Financial, LLC, a Tennessee Limited Liability Company, is an internet based investment advisory service. Our internet-based investment advisory services are designed to assist clients in personal investment and are not intended to provide comprehensive tax advice or financial planning. Our services are available to U.S. residents only. This website shall not be considered a solicitation or offering for any service or product to any person in any jurisdiction where such solicitation or offer would be unlawful.
Please consider your objectives and tax implications before investing with Raise Financial, LLC. All investments and securities involve risk. Raise Financial does not provide brokerage services.