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.
