529 Plan

[knbbllw]

Made a nonqualified withdrawal from 529 College Plan and received a 1099-Q.  Why is full amount taxable if the money sent to plan was money already taxed as income.  Can understand the earnings being taxable but not the entire amount.  

[KrisD15]

The income tax is only on the earnings, but there is an additional 10% penalty tax as well.

There are exceptions to the penalty, such as also getting a scholarship, but if there is no student, just a distribution, the penalty will apply. 

The rules concerning 529 plans are changing and it may be possible to roll a 529 Savings Account into a Roth IRA starting next year. 

According to the IRS:

“Figuring the Taxable Portion of a Distribution 

The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Figure the taxable portion for 2022 as shown in the following steps. 1. Multiply the total amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2021, plus total contributions for 2022, and the denominator (bottom part) is the value (balance) of the account at the end of 2022 plus the amount distributed during 2022. 2. Subtract the amount figured in (1) from the total amount distributed during 2022. The result is the amount of earnings included in the distribution(s). 3. Multiply the amount of earnings figured in (2) by a fraction. The numerator (top part) is the AQEE paid during 2022, and the denominator (bottom part) is the total amount distributed during 2022. 4. Subtract the amount figured in (3) from the amount figured in (2). The result is the amount the beneficiary must include in income. The taxable amount must be reported on Schedule 1 (Form 1040), line 8z.”

“Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you must

also pay a 10% additional tax on the amount included in

income.”

Pub 970

Link about rolling 529 to ROTH

[Hal_Al]

Q. Why is full amount taxable if the money sent to plan was money already taxed as income?

A.  It isn't.  You've entered it wrong or you're looking in the wrong place. The new IRS forms keep expanding. It's now effectively three times as long as the old "long form".

Since it's a fully non qualified distribution, the calculation of the taxable part is easy: it's the amount in box 2 of the 1099-Q. You'll find it entered on line 8z of Schedule 1, then included in the amount on line 8 of form 1040. The 10%  (10% of the box 2 amount) penalty (technically "additional tax") will be on form 5329, then line 8 of Schedule 2, and ends up included on line 23 of form 1040.