Q. Is there a way to withdraw only the principal?
A. No.
Q. How is it taxed?
A. Any distribution is considered in proportion to the plan's ratio of basis (principal)and earnings. So if you are 50-50, the distribution will be 50% basis and 50% earnings. Only the earnings will be taxed. The 10% penalty on a non qualified distribution will also only be applied to the ernings.
Q. Who is taxed?
A. The "Recipient". You essentially get to choose.
You can designate whether the plan administrator sends the money to the owner or the beneficiary.
For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q, to the recipient, with the recipient's name and SS#. The recipient reports the income on his tax return.
