Taking too much money. You or your beneficiary — you get to choose who receives the money — will have to report taxable income and pay a 10% federal penalty tax on the earnings portion of the non-qualified distribution. The principal portion of your 529 withdrawal is not subject to tax or penalty.

Can you withdraw contributions from a 529 plan?

If your child receives a scholarship, you may withdraw that exact amount from a 529 plan and use it for anything without incurring a penalty on earnings, but you must pay taxes on the earnings. The timing of penalty-free earnings withdrawals is the subject of debate among tax experts.

Can you put too much money in a 529?

Saving too much in a 529 plan is an expensive mistake Money is invested and withdrawn tax-free if spent on qualified educational expenses. But if your savings exceed the cost, you may have to pay tax plus a 10% penalty on what’s leftover. And saving any amount for college before having children is too much.

Taking too much money You or your beneficiary — you get to choose who receives the money — will have to report taxable income and pay a 10% federal penalty tax on the earnings portion of the non-qualified distribution. The principal portion of your 529 withdrawal is not subject to tax or penalty.

Is there a penalty for withdrawal from a 529 plan?

Specifically, a withdrawal from a 529 plan that is not used for qualified education expenses is not subject to the 10% penalty in these situations: The account’s designated beneficiary dies, and the distribution is paid to their estate, or to another beneficiary.

Do you have to report 529 withdrawals on your tax return?

When 529 plan funds are used to pay for qualified education expenses there is usually nothing to report on your federal income tax return.

When to take a distribution from a 529 plan?

The reality is a bit different. A distribution can be taken at any time during the year, and it is tax-free as long as an equal or greater amount of qualifying expenses are paid at any time during the year. In other words, the use of the distribution proceeds does not have to be traceable to the actual payment of college expenses.

What does a 529 plan do for You?

A 529 Plan account is a tax-advantaged savings account designed for higher education expenses. You can put money into the account for a designated beneficiary, and the invested money can grow tax free. As long as you use the money for qualified educational expenses, you’ll never pay taxes on the growth.