529 plan 10% penalty for non-qualified withdrawal

[detjason]

I understand that withdrawing money from a 529 account for non-qualified (non-education) purposes results in a 10% penalty, in addition to regular income tax, on the earning portions of the withdrawal. Is there an easy way to calculate what this penalty would be?

[disneysteve]

I understand that withdrawing money from a 529 account for non-qualified (non-education) purposes results in a 10% penalty, in addition to regular income tax, on the earning portions of the withdrawal. Is there an easy way to calculate what this penalty would be?

The penalty is 10% of the amount so calculating it is pretty simple. Take out $1,000 that isn't for qualified expenses and you'll pay a $100 penalty.

How much the tax will be is more complicated. A rough estimate would be your tax bracket multiplied by the amount being taxed, though it isn't quite that simple. At least that would give you a ballpark estimate.

[cooliemae]

Just remember that the penalty is only on the earnings, not the principal and that you might owe state taxes if the 529 money was used as a deduction.

[disneysteve]

Just remember that the penalty is only on the earnings, not the principal

The 10% is only on the earnings? That's good to know.

I actually paid the penalty last year due to screwing up the timing of a withdrawal but my accountant handled everything so I honestly don't know the dollar amounts involved.

That said, I'll share the same warning I shared after it happened. Make sure that your withdrawals occur in the same calendar year as your expenditures. I took money out in December and didn't actually pay the bill until the beginning of January. Since that was a different tax year, it made the December withdrawal non-qualified even though the money actually did go to pay qualified expenses.

[Like2Plan]

If you received a distribution, you should receive a 1099-Q that shows the gain on the contribution.

Here are couple of links on that topic:

https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/Guide-to-IRS-Form-1099-Q--Payments-from-Qualified-Education-Programs/INF19500.html

http://budgeting.thenest.com/handle-529-plan-distributions-24154.html

Non qualified distribution gains are reported on line 21 of 1040

https://www.irs.gov/pub/irs-pdf/f1040.pdf

The penalty is calculated on Part II of IRS Form 5329.

https://www.irs.gov/pub/irs-pdf/f5329.pdf

The penalty is reported on line 59 of your 1040.