Thank you for your response, @NCperson. The idea of sending proceeds of any withdrawals, either qualified or non-qualified, to the beneficiary (my child) of an account by the account owner (me) is allowed by the NYSaves 529 program - and indeed any 529 program. The 1099-Q is addressed to me (with my SSN) for cases where I request the withdrawal proceeds to be sent to me and with my beneficiary's SSN when the proceeds are sent directly to her (for book purchases, for example) or if sent directly to the school (for tuition say). I have used all these ways to withdraw funds.
In fact, NYSaves 529 website allows these two options (account owner or beneficiary) ***even for non-qualified withdrawals.*** Please see under "Making withdrawals - How do I make withdrawals from the plan" at: FAQs: Managing your account | NY 529 Direct Plan (nysaves.org)
where the relevant excerpt reads (my emphasis added):
"All other withdrawals (i.e. ****nonqualified withdrawals****) can be sent to:
- The account owner.
- ****The beneficiary.****"
I tried to get a screen shot inserted for your convenience but was unable to do so.
I will also send you other links from web sources and indeed TurboTax community responses which say that a closed out 529's proceeds can be sent to the beneficiary to avail of that person's presumably lower tax rates. Please give me a bit of time to find these links for sources, as I have hundreds of tabs open.
Thus, I was doing a WHAT IF based on what I read, including the NYSaves rules linked to and excerpted above.
If you agree that this is indeed legally possible, I wonder if I could ask you to have a look at my preceding message and see if there is an answer to my question about the potential double taxation in the example.
Note that NY State is not being cheated out of the taxes. I am paying taxes on the full withdrawal and my daughter (beneficiary of the 529) is paying taxes on the earnings and the 10% federal penalty. But we seem to be double taxed on the earnings portion.
Thanks again for your thoughtful and cautionary response.
