taxes on 529 withdrawal | TaxConnections (2024)

Tax reform added some new taxpayer-advantageous changes to college savings plans. These plans are also known as qualified tuition programs (QTPs) or Sec. 529 plans, named after the part of the Internal Revenue Code that established them.

Background:Sec. 529 plans allow taxpayers to put away larger amounts of money than other tax-advantaged education savings plans do, limited only by the contributor’s gift tax concerns and the contribution limits of the intended plan. There are no limits on the number of contributors, and there are no income or age limitations. The maximum amount that can be contributed per beneficiary (the intended student) is based on the projected cost of college education and will vary between the states’ plans. Some states base their maximum on the projected costs of an in-state four-year education, but others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000, with some topping $370,000. Generally, additional contributions cannot be made once an account reaches the state’s maximum level, but that doesn’t prevent the account from continuing to grow.

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My grandparents set up a 529 Plan for me and my two brothers when I was very young. My parents eventually divorced and three 529 Plans were turned over to my father. My mother placed $25,000 each into our 529 Plans when she and my dad divorced.

My father took control of the 529 Plan and now the $25,000 my mother placed into each three sons 529 Plans has been taken out by my father (on all three sons accounts- $75,000 Total).

My father is signing over all the 529 Plan Accounts over to three sons and we are curious who is responsible financially for all the money my father took out? My mother told us taxes are taken out for early withdrawal from our 529 Plans? My mother indicated we will be responsible for paying taxes on the money my father took out. Is this true? Who is responsible for early withdrawal taxes? My dad is in the process of certifying we are now responsible for the 529 Plans. Who will be legally responsible to pay taxes for early withdrawal if these accounts are officially signed over to us?

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One small provision in the final tax reform bill could impact the way people save for the education expenses of their children and grandchildren using 529 Plans.

The new law allows greater amounts of tax-free savings than what’s permitted in a Coverdell Savings account—and the funds can be used for the same expenses. This creates an opportunity to shelter additional investment portfolio income from taxes by expanding the type of expenses that are eligible for reimbursem*nt using 529 account funds. Read More

When Julie Craft started saving money for her daughter’s education through a 529 college-savings plan several years ago, her financial planner told her she could use those savings for any college expenses.

Then she switched planners and learned that wasn’t the case—just in time, as her daughter is now a freshman at the University of Oklahoma. “You have to know what you can use the money for so you don’t wind up paying more in taxes and penalties,” says Ms. Craft, who lives near Dallas.

Her new financial planner, Todd Schneider of Southlake, Texas, says he has encountered a lot of confusion among clients about how to use the money they have accumulated in Read More

The Tax Cuts and Jobs Act (“TCJA”) made significant changes that affect international and domestic businesses, such as deductions, depreciation, expensing, tax credits and othertax items. This side-by-side comparison can help taxpayers understand the changes and plan accordingly.

Some provisions of the TCJA that affect individual taxpayers can also affect business taxes. Businesses and self-employed individuals should review tax reform changes for individuals and determine how these provisions work with their business situation.

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You know the old line about the inevitability of death and taxes? It’s still true. What isn’t inevitable, however, is the need to pay penalties to the IRS. It happens, but it doesn’t have to, and the main reason that it does is because taxpayers don’t educate themselves about the rules. When you get hit with anIRS penalty, it adds on to a number that you already wish you didn’t have to pay.

To ensure that you get through tax season without unnecessary costs and aggravation, here’s a list of the tax penalties that the IRS most frequently assesses against taxpayers.

The 8 Most Common Tax Penalties Assessed

1. Penalty forunderpaying estimated tax payments
2. Penalty for taking early withdrawals from tax-advantaged retirement accounts, including IRA accounts and 401(k) accounts
3. Penalty for taking nonqualified withdrawals from 529 plans, health savings accounts (HSAs), and similar tax-favored accounts
4. Penalty for failing to take required minimum distributions (RMDs) from tax-favored retirement accounts
5. Penalty for making excess contributions to IRAs and other tax-favored accounts
6. Penalty for failing to file, or for filing your required tax return after the designated due date
7. Penalty for failing to pay your taxes on time
8. Penalty for filing a substantially incorrect tax return or taking frivolous positions on a return

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All too often, taxpayers wait until after the close of the tax year to worry about their taxes, missing opportunities that could reduce their tax liability or help them financially. Fall is the perfect time for tax planning. The following are some events that can affect your tax return; you may need to take steps to mitigate their impact and thus avoid unpleasant surprises after it is too late to address them.

• Did you get married, divorced, or become widowed?
• Did you change jobs or has your spouse started working?
• Did you have a substantial increase or decrease in income?
• Did you have a substantial gain from the sale of stocks or bonds?
• Did you buy or sell rental property? Read More

When my 13 year old got her first baby sitting check, a range of emotions ran through me. I was happy, proud as a mother hen could be and also a little worried as I thought of how my “baby” was so grown up that she could take care of other “babies”! As she made plans to deposit that money in her UGMA Bank Account, I realized I had an idea for my next blog post!

Like I said, my kids like any self-respecting accountant’s children, were equipped with UGMA Accounts at a tender age. It’s never too early to start saving, I find that it’s also never too early to start teaching about the importance of being financially responsible! It can however be a little overwhelming when trying to decide what account to open for your child. Read More