A client wants to roll her state sponsored qualified pre-paid tuition program into a 529 plan for her son. The state program does not allow for direct trustee-to-trustee transfer, only 60-day rollovers. The client received the check minus a $120 in maintenance and cancellation fees.
Will the 1099 reflect the account value minus the $120 or will it be included? If included, will she need to make-up the $120 out of her own pocket?
Thanks.
Probably the first way -- ie. the 1099-R gross distribution will be the actual amount minus the $120. If you pay the penalty with post- tax dollars, then you can deduct it as an adjustment to income, line
30 ("penalty on early withdrawal of savings").
Sorry for typo, should be 1099-Q above. R is for rollovers from 401k plans and such.
The penalty on early withdrawal of savings is listed on form 1099- INT. The 1099-Q does not have a field for penalty, so I don't know if you can deduct it. The following method is one that I considered: say you contributed 5k to your 529 plan and did not receive a federal deduction, and your earnings grew tax free by 1k, then of the $120 penalty 5/6*1200 comes from the original 5k so is considered paid with post-tax dollars, but I don't know if you can deduct it.
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