• LinkedIn
  • YouTube
  • Twitter
  • Facebook
  • Google+

Section 529 plans: for education only

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Q. My son decided not to go to college. Will he pay tax if he takes cash from a Section 529 plan to buy a car? K.C., Massapequa, N.Y.  

A. Yes. Withdrawals of earnings from a Section 529 plan are tax-free only if the funds are used for qualified higher-education expenses like tuition and supplies. To add insult to injury, your son will have to pay a 10% penalty on the taxable amount of withdrawn earnings. Eventually, all funds withdrawn from the account will be taxable, other than the principal you contributed.

Tip: If you have another child, however, you can roll over your son’s 529 account balance tax-free to another account set up for the other child.

Leave a Comment