Comments on: What Is The 529 Plan Penalty And How To Avoid It

By: Robert Farrington

Robert Farrington — Fri, 12 Jul 2024 21:29:24 +0000

In reply to Allen.

Not sure I completely understand what you’re asking. Did you simply change the beneficiary, or actually rollover the plan from one state to another?

As for not using a 529 plan, there is no penalty for leaving the money inside the 529 plan and letting it grow. In fact, many wealthy families stuff their 529 plans and use them as estate-planning tools and let them grow for decades – simply changing the beneficiary as needed.

By: Allen

Allen — Fri, 12 Jul 2024 21:26:53 +0000

What happens if you do two rollovers for the same beneficiary in one calendar year to consolidate?
Are the funds really subjected to a 10% penalty if you do not use them?

By: Robert Farrington

Robert Farrington — Thu, 13 Jul 2023 15:06:12 +0000

In reply to Tanner. Correct, it's ordinary income taxes and a penalty on the Federal level. One the state level, you're also subject to ordinary income taxes, and then a penalty or recapture of prior tax benefits (depending on the state).

By: Tanner

Tanner — Thu, 13 Jul 2023 14:37:58 +0000

you mentioned it’s a 10% penalty + capital gains tax on the earnings for non-qualified withdrawals. is it not income tax + the 10% penalty on earnings?

By: Robert Farrington

Robert Farrington — Tue, 11 Jul 2023 20:48:00 +0000

In reply to Dewey Engelsma. The 10% federal penalty is on earnings. Each state has their own penalty and/or recapture of their state tax deduction if applicable. The penalty may be on earnings (for example, CA has a 2.5% penalty on earnings only), or it could be a recapture of the entire tax deduction, whether there was earnings or not (since you still had a tax benefit even if you didn't earn any money and it's just re-capturing that).