Return of initial Investment in a 529 Plan

Scenario - In 2005 I put $40 K into an out-of-state 529 plan, no tax ramifications/deductions. Now, the plan is worth $80K. My understanding is that I can withdraw my initial $40K without any tax ramifications since it is just a return of my initial investment and I took noinitial tax benefits. Right, wrong, or ?????

Reply to
hrhofmann
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Wrong. You can not pick and choose what part of the balance to withdraw. Every distribution contains contributions and earnings. If you don't spend any part on qualified expenses, then the part of the distribution that is earnings is taxable. In your example you would have taxable earnings being distributed and you would also have to pay the 10% penalty.

Reply to
Alan

Every distribution contains contributions and earnings. If you don't spend any part on qualified expenses, then the part of the distribution that is earnings is taxable. In your example you would have taxable earnings being distributed and you would also have to pay the 10% penalty.

OK - I think I understand. Now, for my example, if I take out $40K, one half ($20K) would be a return of my initial investment and not taxable or penalty fodder, and one-half ($20K) would be capital gains and taxable and subject to penalty???

Reply to
hrhofmann

Every distribution contains contributions and earnings. If you don't spend any part on qualified expenses, then the part of the distribution that is earnings is taxable. In your example you would have taxable earnings being distributed and you would also have to pay the 10% penalty.

Almost. One-half would be ordinary income, not capital gains, and subject to penalty.

Ira Smilovitz

Reply to
ira smilovitz

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