How to waive 10% penalty (because of military academy attendance) on 529 plan earnings distribution? There is no question about academy attendance after the summary page.

[MaryK4]

If you used the 529 funds for qualified educational expenses (military academy expenses) the distribution is tax free and the 10% penalty does not apply.  Check your entry in the education section to make sure your tuition was entered.

[Carl]

Take special note here:

When  you have a 529 distribution that was used for the allowed (though unqualified) expenses of room and board, it is extremely important that you work through the education section the way the program is designed and intended to be used. If you do not, then chances are extremely high that you will *NOT* be asked for those room and board expenses paid with 529 funds. Therefore, the distribution will be taxable.

[kmmo1998]

Does the 10% get waived for service academy attendance even if it is not for educational purposes? That is the assumption I was under.

[Carl]

The money must be used for "qualified" education expenses, *or* the unqualified but "allowed" expenses of room and board *in direct support* of the education.

[scandelay]

I don't think this is correct. You can make nonqualified withdrawals provided the amount does not exceed the cost of education. In this case, you still pay tax at your regular rate on the earnings but do not pay the 10% penalty. This is summarized here, for example: https://www.collegeadvantage.com/blog/blog-detail/posts/2020/11/09/veterans-gi-bill-and-529-plans-wo...

but also detailed in the IRS 5329 form instructions.

I am not sure how to handle this is in Turbotax ... will have to file an amended return from last year and trying to decide what to do this year. 

[ColeenD3]

This article refers to education costs.

"A 529 plan can supplement these service-earned education benefits. If you split your Post-9/11 GI Bill benefits among multiple dependents, then a 529 plan can help cover the remaining qualified higher education expenses

 associated with attending a two-year or four-year college, apprenticeships, trade or vocational school".

The ultimate authority is the IRS and they say this:

4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

Pub 970

[scandelay]

I think there are 2 things to consider here:

1) Qualified withdrawals associated with costs associated with attending a military academy like USMA. These are like any other qualified withdrawal from a 529 for education-related expenses though typically harder to come up with for a military academy as almost all is included for attending students/cadets/midshipmen etc.

2) Non-qualified withdrawals. Normally you would pay tax on the 529 earnings portion at your tax rate and also pay a 10% penalty on the earnings. The Military Family Tax Relief Act of 2003 and documented in the  instructions for Line 6 in the 5329 instructions exempts the ("Distributions from an education account
made because of attendance by the beneficiary at a U.S. military academy. This exception applies only to the extent that the distribution doesn’t exceed the costs of advanced education (as defined in title 10 of the U.S. Code) at the academy.") means that you pay the tax on earnings but not the 10% penalty up until the total cost of attendance. Line 6 reverses the penalty imposed on Line 5 of 5329 and means that Line 6 of Schedule 2 should be 0. I still think this is a miss in Turbotax.

[scandelay]

I will follow up with this and say that I successfully filed an amended 2020 federal return removing the 10% penalty. I then used Forms mode in my 2021 return to remove the 10% penalty from form 5329 and this was also accepted by the IRS. This was a pain because I had to print out all forms and mail them in instead of e-filing them. Turbotax does not understand this exemption from the 10% penalty but needs to and needs to fix this, please.

[55yy34]

This is a hassle.  I am getting ready to do the same.  The online version does not seem to allow a way to put the correct number in lines 5,6, and 8 of Form 5329.  There needs to be a line asking if the beneficiary attended a military academy.  By definition the person (beneficiary) can't be a dependent.  Turbo needs to fix this, it isn't hard.  

[scandelay]

I agree. I have had to generate the PDFs and then edit those boxes in the PDF and then file my return via mail. Very old school. 

[55yy34]

Dude, a miracle-I got it to work last night!!  I was just going to come on here.  Go thru the 1099 steps-recepient not beneficiary, and person not listed, etc.  Do not enter the "not used for ed purposes" box.  After you enter the 1099 boxes down below it says "done."  Hit done and then a box comes up asking if the person attended a military academy.  Leave the ed expenses boxes empty.  You might have to play with it a bit but this is the basic way.  After I entered it the tax 10% dropped faster than a rock.  Turbo I guess conceptualizes as two steps-a 1099 entry and then the tax alleviation.  It is there, you can do it.  Let me know if you got it to work.     

[scandelay]

Yes, thank you very much! It seemed like I had to run forward and back through it a few times before it caught but then it did! Thank you very much. Saved me a lot of angst. 

[55yy34]

Great news!