Author Topic: 529 withdrawal without taxes ?  (Read 640 times)

Evad

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529 withdrawal without taxes ?
« on: March 05, 2022, 10:04:52 AM »
My 24 year old Son has $31K in a 529 that his grandparents funded with $20K. He is done with school and does not need the money.

Can he take out $20K tax free ? I was under the impression that only the gains are subject to taxes and penalties if the money is not used for qualified education expenses.

If so,  this would be cool as he could take out $12K and fund his Roth for 2021/2022 which he was going to do $6K from savings anyway.

gocurrycracker

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Re: 529 withdrawal without taxes ?
« Reply #1 on: March 05, 2022, 10:26:33 AM »
529 withdrawals are pro rata - some will be earnings, some will be basis. There is no way to do a basis only (contribution only) withdrawal.

Any non-qualified earnings withdrawal will be taxed and penalized (10%)

Evad

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Re: 529 withdrawal without taxes ?
« Reply #2 on: March 05, 2022, 11:38:44 AM »
529 withdrawals are pro rata - some will be earnings, some will be basis. There is no way to do a basis only (contribution only) withdrawal.

Any non-qualified earnings withdrawal will be taxed and penalized (10%)

Thank you for the quick response.

Might still be worth it to take the hit now to get more into his Roth at 24 than wait 20+ years when he is not even married yet.


gocurrycracker

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Re: 529 withdrawal without taxes ?
« Reply #3 on: March 05, 2022, 03:26:58 PM »
Earned income is required for Roth contributions. If he has at least $6k of earned income in 2021 and the same in 2022, then he can contribute to Roth IRAs for both years.

Any withdrawals from a 529 won't qualify as earned income for Roth contributions. But it can be a source of cash.

To get $12k in cash from the 529:
Withdraw: $12,500
Basis: $8,065 ($20k/$31k*$12.5k)
Earnings: $4,435 (withdrawal - basis, 12.5k - $8,065 = $4435)
Penalty: $443.50 (10% of earnings)
Actual cash from withdrawal: $12,056

Income tax will also be due. That $4,435 could be taxed with an additional 10%, 12%, 22%+ (or it could be 0% - all depends on income.)
State income tax (and penalty) could also be due.

529 funds can also be used to pay student loans, transferred to another person in the family, or used for K-12 expenses on future kids (less than 20 years from now.)
« Last Edit: March 07, 2022, 11:13:30 AM by gocurrycracker »

Evad

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Re: 529 withdrawal without taxes ?
« Reply #4 on: March 07, 2022, 07:50:23 AM »
Earned income is required for Roth contributions. If he has at least $6k of earned income in 2021 and the same in 2022, then he can contribute to Roth IRAs for both years.

Any withdrawals from a 529 won't qualify as earned income for Roth contributions. But it can be a source of cash.

To get $12k in cash from the 529:
Withdraw: $12,500
Basis: $8,065 ($20k/$31k*$12.5k)
Earnings: $4,435 (withdrawal - basis, 12.5k - $8,065 = $4435)
Penalty: $443.50 (10% of earnings)
Actual cash from withdrawal: $12,056

Income tax will also be due. That $4,435 could be taxed with an additional 10%, 12%, 22%+ (or it could be 0% - all depends on income.)
State income tax (and penalty) could also be due.

529 funds can also be used to pay student loans, transferred to another person in the family, or used for K-12 expenses on future kids (less than 20 years from now.)

Thanks : )

 He does have an income. He makes around $50-$60K and has been funding his Roth since he was 19. Just looking at options to use some other funds as keeps saving for a futre home.

Thanks for the great info.

« Last Edit: March 07, 2022, 11:13:43 AM by gocurrycracker »