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 To add insult to injury, your son will have to pay a 10% penalty on the taxable amount of withdrawn earnings. Eventually, all funds withdrawn from the account will be taxable, other than the principal you contributed.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.