We live in California and want to pull out our son's 529 for private school k-12 tuition. Is there a penalty? Has California accepted the Federal tax code?

[SweetieJean]

Here is some info at https://www.scholarshare529.com/buzz/?id=104315. It looks like CA taxes the 529 distributions towards K-12 tuition expenses.

May 02, 2018
The federal tax reform bill, which was signed into law on December 22, 2017, includes provisions related to Section 529 college savings plans. Specifically, language in the bill allows distributions used for up to $10,000 of tuition expenses at a public, private or religious elementary, middle, or high school per student per year from all Section 529 college savings plans and rollovers out of 529 college savings plans into Section 529A ABLE accounts to occur free of federal tax.

Note for California taxpayers: The California Franchise Tax Board (FTB), in its role as the State's tax authority, has determined that current California State tax law does not conform to the new federal tax treatment. This means that, for California taxpayers, the earnings portion of any distribution from any 529 plan to pay for tuition expenses at a public, private or religious elementary, middle, or high school or any amount rolled-over from a qualified tuition program to an ABLE account may be subject to California income tax and an additional 2.5% California tax.

[RC888]

If this applies to the earnings portion of any distribution, can you please provide an example of what would get taxed if there is no earnings from the distribution? For example, if I contributed $1,000 and withdrew $1,000 with no earnings, would this still be subject to California income tax and an additional 2.5% California tax?

[RobertB4444]

Any portion that you pull out will include earnings.  The 529 plan should be able to calculate the portion that is earnings for you.  The portion that is earnings is taxed.

To help - if you put $18,000 into the account and it earned $2,000 then the balance in the account would be $20,000 - ten percent of which is earnings.  If you pull $1000 out of that account 10% will be classified as earnings or a taxable amount of $100.

@RC888 

[NicoleK25]

Can you please explain once more? What if you are using the 529 as a pass through account until you’re financially capable of letting it grow? Deposit money needed for tuition > pay elementary school tuition from 529 right away. Do you get taxed on the money you contributed or just any earnings from that money? If so, what is the tax rate? 

[Hal_Al]

Q.  Deposit money needed for tuition > pay elementary school tuition from 529 right away. Do you get taxed on the money you contributed or just any earnings from that money?

A. None of it is taxed because elementary school tuition is a qualified expense, up to $10,000.  If you exceed the $10K limit, then only the prorated earnings portion is taxable. 

Q. If so, what is the tax rate? 

A. If part of the distribution is taxable, it is taxed as ordinary income (no special rate). That is, it is taxed at your marginal tax rate. In addition, there is a 10% penalty, for a non-qualified distribution. 

Do you own any savings bonds (in your name, not the child's)?  There's a loop hole available.  Savings bonds cannot be used, tax free,  directly for elementary education.  But, you can cash the bonds, put the money (within 60 days) in a 529 plan, then pull the money out to pay elementary tuition and the distribution will be tax free (up to $10K).  Contact your 529 plan administrator for details on how to do a savings bond "rollover". The untaxed interest portion of the savings bonds is tracked as earnings in the 529 plan.