Skip to main content

529 Plan Distributions NOT for Education

Question:

A mom and dad established a Internal Revenue Code section 529 college fund for their son, but he has decided to join the military instead. What are the penalties if the parents decide to pull the money out of the 529 college fund to give to him for uses other than college tuition? Does the family pay taxes only on the interest that was made or is the entire distribution treated as taxable income?

Answer:

Before we dive into answering the question it is important to understand that there are two types of 529 plans and that all fifty states and Washington D.C. use at least one of these two plans. The Securities Exchange Commission (SEC) defines both types. First, there are prepaid tuition plans which allow individuals to purchase credits at colleges/universities for future tuition at its current rate. These plans typically do not include room and board.

The second type, which falls in line with our question, is an education savings plan. Under this plan, an individual opens an investment account for future qualified higher education expenses (i.e. tuition, room and board).

Generally, a Form 1099-Q will be issued to the son with the earnings portion of the distribution reported in Box 2. Since $0 of the distribution will be spent on qualifying educational costs, the Box 2 amounts will be fully taxable on his personal tax return, plus an additional tax of 10% of the reportable income. IRS Publication 970 (page 52) can be accessed for further guidance on this issue.

Most states also require that tax be paid. Wisconsin, for example, does so. The Wisconsin Schedule CS (pages 4 and 5) can be referenced for further instructions for Wisconsin taxpayers. Again in the case of Wisconsin, since the distribution will not have been made within 365 days of the initial contribution into the fund, the consequences will be less severe.

Of course, redirecting the 529 plan to another child and funding the car purchase outside of those funds will be less costly from a tax perspective.






Comments

Popular posts from this blog

Review: Form 1099 Payments to 501(c)(3) Organizations

Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC.  The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC: Rent paid to an individual (non-corporation) Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers) Support sent directly to missionaries

Special Topic: U.S. Olympic Champion Ben Peterson's Autobiography "Road to Gold"

Road to Gold , by Ben Peterson We are privileged to serve our client Ben Peterson and Camp of Champs, the wrestling ministry he founded   and directs. Ben wrestled for more than 16 years, coached on a collegiate level for 28  years, and has directed Camp of Champs for more than 40 years. We have read his autobiography and found Ben's dedication to the sport and his faith to be inspiring. If you are looking for a good story we highly recommend Ben's  Road to Gold. In Road to Gold , Ben shares the lessons he learned throughout his upbringing and how they led him to achieve Olympic victory. Ben states a key element of his youth was the consistency of his parents. He was encouraged to read the Bible every day from an early age, which he now describes as the most stabilizing habit in his life. Throughout his story Ben also emphasizes the importance of confidence, solid goals, hard work, and consistency. These qualities helped Ben throughout his life and wrestling career, from learni

When you don't know what you don't know

Here at MinistryCPA, we recognize that many churches rely on volunteers and/or part-time treasurers and financial secretaries.  With this in mind, we seek to come alongside ministries in providing the much-needed support to ensure that they are operating in a manner that is both compliant with governing authorities and taking advantage of opportunities for improved stewardship of ministry and employer financial resources.  Please consider this brief checklist to determine if your ministry needs to look further into areas that could be classified as “We don’t know if we are compliant.” Please check all compliance requirements that are currently being met: File quarterly Form 941 or annual Form 944 with the IRS Issue Forms W-2 to all employees and File Forms W-2/ W-3 with SSA Ministerial Housing Allowance is only listed in box 14 of the Form W-2 – it is not included in box 1 Obtain Form W-9 from all individuals/businesses that are paid the cumulative total of $600 or more in the year f