Please help me understand the tax & penalty consequences of overfunding a 529. By overfunding, I mean having money left over in the account after the kid graduates.

Everything I read states that earnings that are distributed for non-education-qualified purposes, are subject to taxes + a 10% penalty.

But what about the principle? For example, If I super-fund a 529 now with the $70k 5 year max for a 529, can I later withdraw a portion of that principal without penalty? Either now, or after the kid graduates.


Thanks.

Yes, no penalty or tax on the principle.

How does that help? It seems unlikely college costs would be less than the amount contributed unless they drop out. Are trade schools and certifications that much cheaper than college these days?

Most peopleple are praying the fund grows enough to cover the cost. I assume if you put $70k in, the first $70k spent is considered the principle. It's not like you can say only $5 of the first $10 spent are principle.

AgLA06 said:

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How does that help? It seems unlikely college costs would be less than the amount contributed unless they drop out. Are trade schools and certifications that much cheaper than college these days?

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I was considering the unknown variables of:

- lack of interest of going to college/trade school
- major scholarships
- heaven forbid, a death of a beneficiary

However, looks like there are exemptions for the latter two.

AgLA06 said:

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It's not like you can say only $5 of the first $10 spent are principle.

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If only earnings are subject to tax & the penalty, why can't the first $10, or first $70k withdrawn, be counted as principle?

That's what I said. I don't believe you get to pick or choose what is or isn't principle. I believe every dollar drawn is considered principle until you hit the amount you put in.

No, part of what you withdraw will be earnings and how much of it is taxable depends on the qualified expenses and the total amount withdrawn. Some might be taxable or none might be taxable. Currently, all of this dovetails with education credits, etc.

If the student you set it up for does not go to college or does not use it all, you can change the beneficiary. One of our children had money left over and we changed the beneficiary to a grandchild.

AgLA06 said:

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That's what I said. I don't believe you get to pick or choose what is or isn't principle. I believe every dollar drawn is considered principle until you hit the amount you put in.

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It isn't done that way. It is pro-rata. If one third of the total is principal, then one third is tax and penalty free.

Harkrider 93 said:

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AgLA06 said:

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That's what I said. I don't believe you get to pick or choose what is or isn't principle. I believe every dollar drawn is considered principle until you hit the amount you put in.

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It isn't done that way. It is pro-rata. If one third of the total is principal, then one third is tax and penalty free.

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Yep. ^^^

Every withdraw will include some principle and some earnings. If it's a qualified withdraw then no taxes or penalties. If you have scholarships then you can make a withdraw equivalent to scholarship without penalty but still have to pay taxes on earnings. I believe the same thing occurs if child were to die or join a service academy.

You always have the option to name another benfiiciary of the 529 plan, another child or grandchild.

i believe you can also reallocate the 529 plan to another kid as well.

BigPuma said:

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i believe you can also reallocate the 529 plan to another kid as well.

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I think it can also be reallocated to yourself or a spouse. I had my son's 529 plan in my name for a while until he was born...

From what i understand you can move it from kid to kid or kid to owner. It just has to be assigned to somebody.

Is one allowed to buy football tickets with it?