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Don’t tap Section 529 plan funds early

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Q. Is there a penalty for withdrawing funds early from a Section 529 plan? C.D., Fremont, Ohio

A. Yes. First, you’ll have to pay ordinary income tax on both the federal and state levels on any withdrawn earnings (but not principal) that aren’t used to pay qualified education expenses. Since you’re calling this an “early” withdrawal, we’ll assume that’s the case. Second, a 10% penalty tax is tacked on. Third, if you also benefitted from a state tax deduction as a result of your contributions, you are required to pay tax on the contributions. If possible, look to other sources for the funds.

Tip: There are certain limited exceptions to the 10% penalty (e.g., for someone permanently disabled).

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