Some or all of withdrawn account earnings might be taxable, so the IRS will be interested to see what is shown on the recipient’s Form 1040. If heavy college costs are incurred, withdrawals taken that year are always federal-income-tax-free. Withdrawn basis amounts are shown in Box 3, and these amounts are always federal-income-tax-free. As explained immediately below, withdrawn earnings may or may not be federal-income-tax-free. Withdrawn earnings are shown in Box 2 of the 1099-Q.
Assuming the account has made money over the years, any withdrawal will include a proportionate amount of earnings and a proportionate amount of tax basis from contributions. ”īox 1 of the 1099-Q shows the total amount withdrawn from the 529 account during the year. This little-known truth can be an unpleasant surprise. “When withdrawals exceed adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable. In that situation, any money taken from the 529 account belongs to the kid and can only be withdrawn for a purpose that benefits the kid - such as buying the kid a car. You’re not allowed to keep a withdrawal from a 529 account that was funded with money from a custodial account set up for the 529 account beneficiary (usually your child or grandchild). If you’re keeping the withdrawal for yourself, if you’re allowed to do so (more on that later), have the check made out to you.įollowing this advice will make it easier for the tax consequences explained below to “follow the money.” Does it matter where the money that funded the account came from? Then have the beneficiary sign the check over to you so you can control how it’s spent. If the money from the withdrawal will go to the account beneficiary, I recommend having the check made out to him or her. That would be you, unless the account was funded with money from your child or grandchild’s custodial account. Both terms are used to describe the person who established and funded the account.
You can have the withdrawal check issued in the name of the account beneficiary (the student for whom the account was set up), or the check can be issued in the name of the college.Īlternatively, you can have the check issued in your name as the account owner or plan participant. Here in FAQ format are the most important things to know about 529 account withdrawals, including the federal income tax angles. So, there can be unexpected tax consequences. However, not all withdrawals are qualified withdrawals.
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