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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
No, you may not count the same expenses for the 529 plan distribution and the IRA withdrawal penalty exception*. But, since you say that the total qualified college expenses are greater than the IRA withdrawal and 529 distribution combined, this should not be a problem in your case.
*For example, if you make a $10,000 529 withdrawal and a $10,000 IRA withdrawal and only paid $18,000 in expenses, you will have to decide how the allocate the the $18,000 between the two tax breaks.
It gets more complicated, as you are probably claiming one of the education credits. You may NOT count the same expenses for a 529 plan withdrawal that your count for a tuition credit. But, you MAY count the same expenses for the IRA penalty exception that you count for a tuition credit.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
No, you may not count the same expenses for the 529 plan distribution and the IRA withdrawal penalty exception*. But, since you say that the total qualified college expenses are greater than the IRA withdrawal and 529 distribution combined, this should not be a problem in your case.
*For example, if you make a $10,000 529 withdrawal and a $10,000 IRA withdrawal and only paid $18,000 in expenses, you will have to decide how the allocate the the $18,000 between the two tax breaks.
It gets more complicated, as you are probably claiming one of the education credits. You may NOT count the same expenses for a 529 plan withdrawal that your count for a tuition credit. But, you MAY count the same expenses for the IRA penalty exception that you count for a tuition credit.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
"the 529 withdrawal was paid directly to the school" is important info. This means the withdrawal is reported on the student's return, not the parent's**. He/she will have $800 of income, not you. It is considered investment income and subject to the "kiddie tax".
*assuming you want to assign the 1st 10K of expenses to the IRA.
**For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the 1099-Q can be either the owner or the beneficiary depending on where the money was sent***. When the money goes directly from the 529 Plan to the school, the student is the "recipient". The 1099-Q gets reported on the recipient's return. ***When you request a withdrawal from the plan, they usually give you three choices: 1. Send it to the owner (you), 2. Sent it to the beneficiary, or 3. Send it to the school.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
I'm my real word scenario, I have a 40k IRA withdrawal and 25k 529 withdrawals. I know I can trace 30k of expenses out of my checking account for qualified education expenses which leaves 10k from the IRA in penalty. Based on your answer above, I will not be able to apply any of the 529 withdrawals to cover this 10k this since the withdrawals are reported on my kids' returns. **Correct**?
In addition, the 529 withdrawals are fully qualified and as such there is no applicable kiddie tax. **Correct**?
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
The 2nd part is not correct. The 529 withdrawals are not fully qualified. You have already used the entire $30K in expenses to avoid penalty on the first $30K of the IRA withdrawal. You cannot also apply those same expenses to the 529 withdrawal. $10,000 (the 40% of the $25K due to earnings) from the 529 plan will also be subject to a 10% penalty in addition to the tax due on the 40%. The penalty is due because you don't meet one of the exceptions (tax free scholarships or claiming a tuition credit),
Room & board are qualified expenses for the IRA exception and 529 plan withdrawal, even though they are not qualified expenses for a education credit.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
Alternatively, you could use $40K of the total $55k of expenses against the IRA withdrawal, totally eliminating the IRA penalty, and only $15K against the 529 distribution, making $4000 (40% of $10K [25-15=10]) subject to tax and penalty. Your original question was "May I offset the 10% IRA penalty with a 529 payment". So, yes, sort of. You can use the expenses that were paid for by the 529 plan to off set the IRA penalty, as long as you don't use the same expenses to claim the 529 plan earnings exclusion. It's probably not a good idea, as that portion of the 529 Plan distribution will be subject to a 10% penalty, in addition to the tax. But the only way to be sure is crunch the numbers to see which way you come out better.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
Everyone's situation will vary, but in my case the break even point on the principal\earnings is ~74%. Since mine is less than that, I'll pay less overall tax by using the *entire* 529 distribution against the actual expenses and the *remainder* of the expenses against the IRA withdrawal.
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I took an early withdrawal from my traditional ira. May I offset the 10% penalty with a 529 payment (60% principal and 40% earnings) for qualified education expenses.
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