Series 51: Withdrawals

Withdrawals

Contributions to a 529 plan are funded with federal “after-tax” dollars and cannot be deducted from a person’s federal taxes. Earnings and withdrawals, however, are exempt from federal taxes, if the funds are used for qualified education expenses and do not exceed the beneficiary’s adjusted qualified education expenses. State tax advantages can vary depending on the state in which the client is opening the account and whether the client is a resident of that state. We will discuss differences in state treatment later in the chapter.

Money from a 529 plan account may be removed at any time for non-educational purposes, but the earnings will be taxed at the contributor’s ordinary income level and subject to a 10% penalty. With