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Question:


I have a 529 account set up for my son's college education. What are my options for this account if he decides to skip school and go straight to the workforce? Will I incur any fees for cashing it out?
-Well_Intentioned


Answer:


A 529 plan, also called a Qualified Tuition Plan, is set up in conjunction with a specific state authority or educational institution and allows money to be saved tax free for a student's education. If your son chooses to give college a miss, you will be taxed on the portion of any money you withdraw that is considered income, while the portion that represents your original contributions will be treated simply as a return of your investment and will therefore escape tax, at least as far as the IRS is concerned. If you deducted the original contributions on your state taxes, then your state is likely to tax them on the way out.
 
Withdrawals are considered to be a combination of contributions and income in the same ratio that they exist in the account. Here is an example: You contributed $50,000 over the years, with no state deduction, and it has grown through judicious investment to $125,000. If you take out $10,000, $4,000 will be considered nontaxable contributions and $6,000 will be deemed taxable income. That portion of the withdrawal will be taxed at your top federal rate plus a 10 percent penalty.
 
Ways to mitigate the tax include having your son withdraw the money, as he is probably in a lower tax bracket than you, or wait until your own top tax rate is lower and withdraw the money then. Another solution, if it applies, is to transfer the account to another child who is college bound.
-Conrad de Aenlle



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