Q. Once that number is known, an additional $4K (10% of $40K) is added to determine my total tax liability. Is my thinking correct?
A. Yes. That's how a non qualified distribution is taxed.
There are other options for handling left over 529 money. Roll over to an IRA is one, but there are restrictions. You can't roll over the whole amount at once and there's a $35K max, over time.
https://www.schwab.com/learn/story/529-to-roth-ira-rollovers-what-to-know
Changing the beneficiary to another family member is another frequently used technique.
https://www.savingforcollege.com/article/how-to-transfer-529-plan-funds-to-a-sibling
This answer has been verified for accuracy by an Intuit expert employee
