1. Home
  2. Financial Planning
  3. 529 contributions and withdrawals

529 contributions and withdrawals

I poked around here a bit, but I don't see this topic covered already. My original question was how best to give the remainder of a 529 to the beneficiary when they are done with college. I would like to close the account and have everything go to the beneficiary. But the rules say that its taxed as income to the Participant. So - is the right thing to do here is change the beneficiary, then make the old beneficiary the Participant, then let him close the account?

And that got me thinking more. I have five sources of income for this account.

  1. I can put my own money in.
  2. Grandmother is going to put money in.
  3. Child is going to put his own money in.
  4. Cloverdell account is going to be closed and all assests moved
  5. I, as trustee of the child's trust fund, am going to move a large some of money from the trust.

Now, all of that seems like a good think to do to grow a college fund as large as possible tax free; but am I correct in understanding that as the Participant I now have the legal right to withdraw the money as mine, just paying tax on the earnings?

And - is the 10% penalty just on the earnings portion of the distribution, or on the whole distribution?

Thanks for your time.

Reply to
Dave
Loading thread data ...

At the other end, you can change 'ownership' to your child, over 18, to make the post-schooling final withdrawal, if that's your wish.

The 10% penalty and any tax are due on earnings only, so you should track the deposits to the account as you would for an IRA whose deposits were post-tax money.

Keep two things in mind:

1) You should try to target the dollars invested so the balance doesn't exceed the cost of college by so much that the tax/penaly is huge. 2) The beneficiary can be changed, so even if you have one child, the remaining money can be targeted to benefit the grandchild, if you don't want it to go off your bloodline.

3) What I haven't found is this - say you deposit $100K over time, and it grows to $250K. You then spend $150 on college, and have $100K left in the account. Is the withdrawal a return of principal avoiding all tax and penalty, or is it prorated, so 40% (100/250) is considered principal? These two produce very different results.

JOE JoeTaxpayer.com

Reply to
joetaxpayer

Hey! I can answer that! EVERY withdrawl that you EVER have is going to be prorated by the 529 plan. They will give you a statement at the end of every year to tell you how much you withdrew, how much was principal, and how much was earnings. Its their problem to keep track, not yours. And you can't try to claim that all your withdrawls were earnings first, and everything left over was principal.

But it seems to me that for tax free compounding for several years, you may still be better off with the taxes and penalties than if you tried to grow it in a taxed account.

My main question is still can I use money from all those sources and it legally becomes mine, the Participant?

Reply to
Dave

In some of the sponsor's writings, I find the words "account owner" (you) and "student beneficiary". Since you, account owner can change the beneficiary as you wish, it appears to me that once another donor has made a gift to the 529, as long as they did not retain their own "owner" status, you are then in control. (Which is why I've seen questions regarding the ability to move money from a UTMA/UGMA to a 529. The former is the minor's property, the latter, not quite theirs. JOE

Reply to
joetaxpayer

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.